On the Decline of R&D Efficiency

Following Bloom et al. (2019), we measure R&D efficiency at the industry level with a simple knowledge production function. We use not only the latest version of the Japan Industrial Productivity (JIP) database but also the EUKLEMS database. We find that R&D efficiency measured directly remains positive in the Japanese manufacturing sector, as would be expected under a simple endogenous growth theory. When we divide the period for estimation into two decades, we find that the direct measure of R&D efficiency declined in the second decade in many advanced countries. In particular, there is significant decline of R&D efficiency in the Japanese information service industry. However, we are not able to confirm the decline of R&D efficiency in the Japanese manufacturing sector in the econometric studies. From these results, there are two implications. First, the decline of R&D efficiency means decreasing returns with differences in scale in a knowledge production function. Second, the R&D policies that focus on the scale of R&D are insufficient. The government should implement R&D policies that address the decline and R&D efficiency differences between industries.