Pakistan & Gulf Economist

Economics of investment in R&D and innovation

Research and development is a critical long-run determinant of productivity of any country, but the main question is how much to invest in R&D and the answer only depends on the returns attached to it in the form of growth and development. Solow in 1956 asserted that sustained technological progress is essential to drive economic growth while the contribution of technology development to growth in the majority of economies is highlighted by new economic growth theories as well so, technological advancement via R&D has recently been a significant driver of individual business success and, as a result, the expansion of the economy. The acquisition of technology can be through innovation or imitation where the imitating country lacks the capability to produce its invention or the availability of capital stock for invention is limited. The high cost of inventing a new idea, process, or procedure can make innovation wasteful, especially in a situation where there is inadequate infrastructure and/or technologists. This makes it impossible for some economies (especially developing countries) to undertake high-cost inventions rather they may prefer to copy when such innovation is available to them. The question of copying an existing technology or becoming a pioneer of new technology will depend on the technological gap between the countries. Theories suggest that copying is beneficial if the technological gap between the imitator and the leader is long while detrimental if the gap is small. However, issues like competitiveness in high-value-added goods, difficulties of cost competition in emerging economies, quality of products, and the desire to change the growth pattern favor an active and huge investment in R&D generation.

As most developing countries like Pakistan specialize in Agriculture so, achieving the goal of poverty reduction plus an increase in agricultural productivity is attainable with investment in agricultural research as an increase in income per capita occurs due to productivity growth in agriculture which significantly helps to lower poverty. Many researchers concluded with the fact that agricultural research has an aggregate rate of return of 55 %, and this helps to reduce the percentage or number of people suffering from poverty by 0.8 % or 2.3 million annually. Although environmental degradation and population growth issues lower the actual effect, researchers still stress that the potential effects of agricultural research remain high.

As we all know, R&D is creative work that is done systematically with the intention of producing new applications and expanding the body of knowledge that requires investment in this important domain, there is a strong need to realize the fact that, today, investing in R&D is a must for the economic growth of businesses, the industry as a whole, and nations and regions. However, economic actors have limited financial resources, so it is crucial to understand the advantages of these investments which may be divided into two main categories: their effects on the process itself i.e., the generation of new knowledge, innovation, etc., and on the process’s ultimate result, the economic development of the nation. On the other hand, the significance of these investments’ effectiveness is consistently underlined.

However, the major issues confronted by developing nations are acute social problems and limited budgets which restrict their governments from investing in R&D but it is a known fact that innovation is an integral part of this R&D and a central aspect of all economic activity, and it is just as important in low-income countries because it enhances productivity and long-term economic growth. In an increasingly interdependent and competitive world economy, innovation becomes a necessary condition for catching up and upgrading global value chains, since it translates into making better products (product upgrading), making them more efficient (process upgrading), or moving into more skilled activities (functional or sectorial upgrading). Contrary to the belief that new technologies eliminate employment, innovation may actually be a key factor in job growth by diversifying the economy and fostering new industries. This frequently results in higher-quality positions with better benefits and working conditions. Public investments in R&D and innovation can also help to solve particular development challenges like food shortages, a lack of quality healthcare, or a lack of infrastructure provided they are effectively mobilized.

Although in developed nations investment in R&D is done by both the public & private sectors, but the state has the capacity to develop its R&D and innovation policy to address the long-term targets of growth and competitiveness that also significantly help with other societal issues that the private sector alone is unable to handle because the state is the only institution who work in the areas where either they reap low profit or no profit where obviously private is not interested to invest as they are profit-making units but it is the state responsibility to develop consensus on R&D and innovation policy by all the stakeholders as R&D and Innovation is not an economic or social good in itself, and policy should only be seen as a means to achieve specific development objectives which require efficient and transparent processes for setting up policy priorities, open to diverse interests and new voices, including those of poorer and marginalized communities. Governments should also embrace i policy to a larger extent to improve public services and institutions, for example, through e-government platforms to better deliver citizen services and reduce costs of doing business.

It is important to draw attention to two key innovation routes that may be particularly important for developing nations. As the primary source of income for a sizeable section of the population in low and medium-income countries, it is crucial to take into account how innovation operates in the informal sector. It is obvious that innovation in this setting typically relies on incremental and non-technological innovation rather than R&D. However, the informal sector is not included in official statistics so, evaluation of R&D and innovation is very difficult in these settings and it is very crucial to develop the link between these formal and informal sectors.

It is recommended that Public programs must invest in R&D and innovation based on a coherent discourse that highlights the particular market, structural, and public value failings that need to be addressed if they are to be successful. Investments should be made in accordance with the nation’s technological prowess and level of economic growth. In addition, it is also concluded that in order to build sustained political and budget commitment to R&D policy, public investments would need to be accompanied by appropriate mechanisms to monitor and evaluate the results accompanied by the broad-based support to mobilize and sustain because measuring the results of public investment in R&D and innovation is very complex. There are direct returns but also indirect effects. Most of the returns are intangible. Some of the results can be measured in the short term but most will only become visible in the long term which requires change in a “critical mass” before nations can produce significant scientific outputs and offer economic dividends poses a particular problem for developing countries. Because of this, it is more difficult for policymakers in developing nations to promote the continuity and growth of public investment in R&D and innovation.

The Author is MD IRP/Faculty Department of H&SS, Bahria University Karachi

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