Assessing the impact of public R&D investments on the economic growth using the CGE approach

In line with the EU strategy on smart and sustainable growth, increasing attention has been directed to Research and Development activities in the Czech Republic. Both public and private Gross Expenditures on R&D (GERD) have doubled between 2000 and 2008. Whereas the private sector still contributes most to total R&D expenditures, public research has also seen a considerable increase. Particularly in agriculture, the public GERD, as published by Frascati surveys, increased by 91% in the last decade and is about 3 times larger than private GERD in agriculture. In view of this, there is a growing need to properly evaluate the effectiveness of the publicly invested resources to agriculture in the Czech Republic. In spite of the rich empirical evidence on the productivity effects of public agricultural research and its internal rate of return abroad – see for instance Alston et al. (2000) for US agriculture, Esposti (2000) for Italy or Sheng, Gray and Mullen (2010) for Australian agriculture - there is a lack of relevant studies addressing this issue in the context of the Czech Republic. Furthermore, the usual techniques that econometrically estimate the R&D effects on Total Factor Productivity in agriculture are not applicable due to relatively short time series (data on R&D and agricultural output before 1995 is either not available or affected by strong structural breaks). This paper attempts to overcome the existing methodological constraints in assessing the effectiveness of R&D investments by applying a Computable General Equilibrium (CGE) model which incorporates main ideas of the R&D based endogenous growth theory. With the use of this CGE model, the objective of the paper is to quantify the impact of public R&D investments in agriculture and other sectors on productivity and overall economic growth. The results of this paper are part of the post-doc research grant of the Czech Science Foundation “Evaluation of Research and Development Effects on the Economic Growth of the Czech Republic with the Use of a Computable General Equilibrium model“. The paper applies an intertemporal CGE model built for the economy of the Czech Republic with a particular focus on public investments to research and development. In the CGE model, the demand for the public R?D is driven by governmental expenditures which are determined intertemporaly based on the maximization of governmental utility over time. The higher are the public R?D investments, the higher is the accumulation of knowledge in the economy which increases total factor productivity in each of the production sectors. The CGE model replicates the economy of the Czech Republic in 2008, which is formalized in the Social Accounting Matrix (SAM). The SAM was built with the use of three data sources: Czech National Accounts, publically available R&D data from Frascati surveys and (purchased) micro-level data of private R&D companies, also from the Frascati survey. The final size of the SAM is a matrix of 56x56 size. The following research questions are addressed with the use of the CGE model: ? What should be the optimal level of public R&D investments to agriculture and other sectors in order to maximize the society’s (households) welfare? ? How does this investment optimum contrast with the current and predicted public R&D expenditures to agriculture? ? What would be the impact of additional governmental support to public R&D on the overall economic growth? In order to respond these research questions, the CGE model is applied in two contrasting scenarios. The first scenario – “endogenous R&D-investments” simulates the situation in which public R&D investments are determined endogenously as a result of dynamic optimization. The result of this scenario shows the optimum level of public agricultural R&D investments under the perfect foresight. The second scenario – “exogenous R&D investments” models a situation in which the public R&D activities are stimulated exogenously – by a targeted governmental policy. The results of both scenarios are compared and the recommendations for appropriate design of public policy directed to agricultural research are formulated.