the prevailing costs of capital, these returns imply that actual levels of R&D are only a fraction of socially optimal levels. Interestingly, the study finds that returns to R&D _fall_ substantially with the level of per capita income – in other words returns are _higher_ in poor countries than in rich ones. This result is consistent with the intuition that a dollar of R&D should be more valuable in poor countries that are far from the technological frontier than in advanced countries that must focus on cutting edge innovations that shift the frontier forward. This is likely to especially be the case for R&D expenditures devoted to adapting foreign technologies into forms useful in the local environment.

To summarize, there is some evidence that domestic R&D benefits not only rich economies but can also benefit poor ones. Buttressing a point made earlier, poor economies can especially benefit from development expenditures that facilitate absorption of knowledge from abroad. Although potential returns to R&D in poor countries are high, R&D in these economies is held back by macroeconomic instability, underdeveloped financial systems, weak intellectual property rights and low quality public research institutions.

# **_R&D by Sector of Performance and Funding_**

The business sector in East Asia plays an unusually big role in R&D.<sup>23</sup> Table 5 below shows that the median share of business R&D among the main East Asian economies is a little over 60 percent, about the same as for developed economies and higher than Latin America (around 30 percent) or Emerging Europe (a little over 40 percent). Exhibit 8 indicates that the business share in R&D performed **<mark>Exhibit 8</mark>** generally rises with per capita income. **R&D Performed by Business Sector in** However several East Asian economies – **2002 versus GDP Per Capita (PPP)** China, Korea, Malaysia and Philippines - 100 Sources: UNESCO Statistics on have much higher business shares than Science and Development. Luxembourg would be suggested by per capita GDP 90 World Bank World Development Japan alone.<sup>24</sup> Table 5 indicates that for the East 80 Indicators. Singapore Korea Asia region over all, the median proportion 70 Malaysia of R&D performed by government – 60 China around 22 percent – is much higher than Philippines among developed economies, while the 50 proportion performed in higher education 40 Thailand is much lower. This may point to a need to 30 Hong Kong strengthen the role of research at East Asian universities, particularly among the 20 newly industrialized economies (NIEs).

<!-- Start of picture text --> R&D Performed by Business Sector in<br>2002 versus GDP Per Capita (PPP)<br>100<br>Sources: UNESCO Statistics on<br>Science and Development. Luxembourg<br>90<br>World Bank World Development Japan<br>80 Indicators.<br>Singapore Korea<br>70<br>Malaysia<br>China<br>60<br>Philippines<br>50<br>40 Thailand<br>Hong Kong<br>30<br>20<br>10<br>Indonesia<br>0<br>7 8 9 10 11 12<br>GDP per Capita (PPP, Log)<br>R&D Share of Business Sector (%)<br><!-- End of picture text --> Turning to the financing of R&D, the median share of government funding for R&D in East Asia is about one third, roughly the same as among developed 23 Business R&D here includes domestic private firms, public sector firms and foreign affiliates operating in the country. Government R&D refers to executive branch organizations not engaged in production. 24 Hong Kong is an outlier in the other direction: R&D intensity and the proportion of R&D performed by business and government are low for its level of per capita income, with the bulk of R&D occurring in higher education.

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