R&D expenditure and capital in Europe

1. R&D expenditure and capital in Europe Hubert Strauss Economic & Financial Studies European Investment Bank, Luxembourg COINVEST Academic Conference Lisbon, 18 March 2010

2. Overview • R&D expenditure: Basic facts • R&D: From expenditure to capital stocks • Business R&D capital stock estimates… • …across countries • …across industries • …relative to value added • …relative to the tangible capital stock • …and how they are correlated with TFP

3. Basic facts on R&D expenditure (1) R&D expenditure by sector (% of GDP), 2000-07 Business sector Government and Higher education Source: Eurostat

4. Basic facts on R&D expenditure (2) Business R&D expenditure (% of GDP) Japan US EU Source: Eurostat

5. Basic facts on R&D expenditure (3) Industry shares in EU total business R&D expenditure, 2005 Chemicals & Pharmaceuticals19% All other27% Transport equipment25% ICT and other equipment 29% Source: OECD, own calculations

6. From R&D expenditure to capital stocks • Capitalisation rate: 100% • Deflation of R&D expenditure: GDP deflator • Geometric depreciation: 12% • Initial capital stock: “First-7-years-growth” assumption • Data source: R&D expenditure from OECD ANBERD • Existing work • EU-KLEMS R&D capital stocks for 15 countries 2003 • Our work • We updated EU-KLEMS R&D capital stocks to 2005/06 • We estimated R&D capital stocks for 7 more countries

7. Business R&D capital stock estimates in % of GDP, 2005 Source: OECD, EU-KLEMS and own calculations

8. R&D capital stocks across countries % of GDP, 2005 Source: OECD, EU-KLEMS and own calculations

9. Different growth speeds of R&D capital stocks Index 1995=100 for each country FI DK ES SE UK EU DE FR IT Source: OECD, EU-KLEMS and own calculations

10. More of a standstill than convergence EU average FI “Catching up” “Speeding ahead” SE DK JP BE ES IE PT DE NL FR IT EU average EL US UK “Falling behind” “Losing steam” Source: OECD, EU-KLEMS and own calculations

11. Business R&D capital stock estimates in % of GDP, 2005 Source: OECD, EU-KLEMS and own calculations

12. R&D capital stocks by industry in % of GDP, 2005 Other Services Other manuf. ICT&other equip. Transport Chemicals&Pharma. Source: OECD, EU-KLEMS and own calculations

13. R&D capital intensities R&D capital stock (in % of industry’s output), EU, 2005 US Transport equipment Chemicals & Pharma. ICT & other equipment Total Other Source: OECD, EU-KLEMS and own calculations

14. R&D-capital to tangible-capital ratio, 2005 Source: OECD, EU-KLEMS and own calculations

15. R&D capital intensities and R&D capital ratios, EU, 2005 Source: OECD, EU-KLEMS, own calculations

16. Connection between R&D capital and productivity Source: EU-KLEMS (TFP); EU-KLEMS, OECD and own calculations (R&D).

17. Summary and implications • R&D capital stocks are important • EU lags behind US and Japan in business R&D — Need strong and sustained increase in R&D spending • Tremendous diversity in R&D capital stocks within the EU — No clear sign of convergence over time • Positive connection between R&D capital and TFP growth  Include R&D capital in production function estimations

18. R&D expenditure and capital in Europe Hubert Strauss Senior Economist European Investment Bank, Luxembourg h.strauss@eib.org COINVEST Academic Conference Lisbon, 18 March 2010