Endogenous Growth and R&D Infrastructure: A Dynamic CGE Modelling Approach for India

Endogenous Growth and R&D Infrastructure: A Dynamic CGE Modelling Approach for India

Koushik Das (Shyampur Siddheswari Mahavidyalaya, India)
DOI: 10.4018/978-1-5225-2361-1.ch008
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Abstract

This chapter attempts to capture the effects of R&D led endogenous growth in an open economy Computable General Equilibrium (CGE) framework which is based on R&D based social accounting Matrix (SAM). Effects of physical and R&D led knowledge capital accumulation have been studied through simulation experiments. It is reported that increase of public expenditure in R&D promotes growth and expands sectoral outputs at the cost of fiscal deficit. Moderate increase of direct tax in the form of education can finance public expenditure on R&D without much reduction of real domestic income of the households.
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Introduction

Endogenous growth is the long-run economic growth at a rate determined by forces that are internal to the economic system. In the long run the rate of economic growth, as measured by the growth rate of output per person, depends on the growth rate of total factor productivity (TFP), which is determined in turn by the rate of technological progress. The neoclassical growth theory of Solow (1956) and Swan (1956) assumes the rate of technological progress to be determined by a scientific process that is separate from economic forces. Neoclassical theory thus implies that economists can take the long-run growth rate as given exogenously from outside the economic system. Endogenous growth theory challenges this neoclassical view by proposing channels through which the rate of technological progress, and hence the long-run rate of economic growth, can be influenced by economic factors. It starts from the observation that technological progress takes place through innovations, in the form of new products, processes and markets, many of which are the result of economic activities. For example, because many innovations result from R&D expenditures undertaken by profit-seeking firms and Public/Private Universities and research institutions. Economic policies with respect to trade, competition, education, taxes and intellectual property can influence the rate of innovation by affecting the private costs and benefits of doing R&D.

Bureau of Economic analysis (BEA) in July 2013, at the U.DS, Department of commerce began producing modified statistical data based on a new standard: The System of National Accounts 2008 (2008 SNA). The US becomes the third country to adopt this standard after Australia and Canada. The United Nation’s statistical Commission (UNSC) updated the former version of SNA 1993, in SNA, 2008 in dealing with investment and trade data. Important with regards to investment side is that expenditures on Research & Development (R&D), weapon systems and artistic originals are treated as investments. Capitalization of R&D expenditures has an important meaning because the influence of knowledge based industries is getting bigger in the modern era. National economy is thought to get a large effect from R&D investments.

The reason behind R&D expenditure is considered to be important is that R&D activity is the procedure used to produce “knowledge”. As the concept of human capital is widely accepted since Becker (1964), it is regarded as both a source of creative outcomes and an accumulation through continuous investments. In this regard human capital is also known as knowledge capital. Many studies have considered knowledge as the productive asset and enter into the production function in its own right.

In the classical production theory R&D expenditure turns out to be one reason for TFP growth. TFP is the residual that cannot be explained by input factors and represents the productivity of the process. Empirical studies have also reported positive correlation between TFP growth and R&D activity indicating that countries eager to invest in R&D show long term increase in their TFP.

Key Terms in this Chapter

Calibration: The parameter values of a CGE model are computed using a method known as Calibration, which enables to generate base year equilibrium values or short run solution. Method of Calibration relies on the assumption that the economy is in Equilibrium. This is established by invoking a benchmark dataset to represent equilibrium for the economy in such a manner that the model is actually solved from the dataset for its parameter values. In our analysis benchmark dataset is represented by our constructed SAM. Equilibrium exists because the SAM is a square matrix whose row and column sum for a given account are equal. In the first stage we have to choose functional form for our model which is based on our model assumptions discussed in the previous section. Model equations are supplied with the data in the second stage so that all parameter and variable values are adjusted with corresponding SAM values.

Trade Liberalization: Process by which world economy is increasing becoming integrated through goods trade movements with free or very low trade barriers and free flow of foreign capital movements. Indian economy has embraced this trade liberalization move right from 1991 and thus on way of crossing 25 years of economic globalization.

Simulation: Computerized imitation of real life scenario. Simulation experiments in a computational model are made to create an artificial scenario for real world predictions. In economics, simulation based methodologies are widely applied while judging the impacts of macroeconomic policies. This can give policy makers an opportunity to choose right policy options among the alternatives.

Endogenous Growth: Long-run economic growth at a rate determined by forces that are internal to the economic system. In the long run the rate of economic growth, as measured by the growth rate of output per person, depends on the growth rate of total factor productivity (TFP), which is determined in turn by the rate of technological progress. The neoclassical growth theory of Solow (1956) AU72: The in-text citation "Solow (1956)" is not in the reference list. Please correct the citation, add the reference to the list, or delete the citation. and Swan (1956) AU73: The in-text citation "Swan (1956)" is not in the reference list. Please correct the citation, add the reference to the list, or delete the citation. assumes the rate of technological progress to be determined by a scientific process that is separate from economic forces. Neoclassical theory thus implies that economists can take the long-run growth rate as given exogenously from outside the economic system. Endogenous growth theory challenges this neoclassical view by proposing channels through which the rate of technological progress, and hence the long-run rate of economic growth, can be influenced by economic factors.

R&D Expenditure: Current and capital expenditures for research and development on creative work undertaken systematically. This is made to increase knowledge, including knowledge of humanity, culture and society along with the knowledge for new applications. R&D covers basic research, applied research and experimental development. R& D expenditures can be public like, govt. expenditures on research institutes, Grant to the Universities for research work, research and development related wings of the government etc. or it can be private R&D, like many multinational corporations investments for patent, copyright or to develop firm specific skills.

CGE: Computable General Equilibrium modelling is mathematical model based on the schematic structure of Social Accounting Matrix, and underlying assumptions regarding behavioral characteristics of the economic agents. CGE models are solved after calibrating the model parameters from a benchmark SAM. Benchmark Equilibrium is generated during solve of the model which is compared with counter factual equilibrium (Generated by solving the model after changing any policy parameter) to get the effects of any policy change.

SAM: The matrix representation of all transactions and transfer that takes place between different production activities, various factors of production and different institutions like households, corporate and government within the country and with respect to rest of the world in a particular financial year. It has a structure of inter industry interdependence and hence depicted in terms of an input-output system. SAM therefore defines a comprehensive framework that can depict full circular flow of income from production activities to factor services like households. From income of the household to household consumption and finally back to production sector once again. Each row of a SAM represents total receipts of any account and column represents expenditure of that account. Therefore row total is supposed to be equal with corresponding column total. An entry in the i th row and j th column represents receipts of i th account from the j th account.

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