accelerating pace. As Exhibit 7 also indicates, the trajectories of R&D intensity in several East Asian economies show persistent deviations from the levels suggested by per capita GDP alone. R&D intensity in Korea, China and Taiwan (China) has run at levels twice those suggested by income. On the other hand R&D intensity in Indonesia, Philippines and Thailand has systematically undershot the estimated average relationship over a long period (both before and after the financial crisis of the late 1990s).

Research at the World Bank by Lederman and Maloney (2003) – one of only a few studies to look at R&D in developing countries – finds that policies and institutions play an important role in explaining these systematic deviations (while structural differences such the size of the economy, the size of the labor force and the relative abundance of natural resources **<mark>Exhibit 7</mark>** do not). In common with other types of investment, R&D intensity declines with higher real interest rates and greater macroeconomic volatility. It increases with greater financial depth and stronger intellectual property rights, as well as with subjective measures of the quality of research institutions such as universities and public research centers, and the quality of collaboration between these institutions and the private sector. The last section of this paper reviews how East Asian economies rank on these economic and institutional correlates of R&D intensity and innovation, finding marked differences between high and low R&D performers.<sup>20</sup> <!-- Start of picture text --> R&D Intensity and Per Capita GDP<br>(mid 1970s - early/mid 2000s)<br>5<br>Sources: UNESCO<br>4.5<br>Statistics on Science and<br>4 Development.<br>World Bank World Japan<br>3.5 Development Indicators.<br>U.S.<br>3<br>Korea<br>2.5<br>2<br>Singapore<br>China<br>1.5<br>India<br>Thailand<br>1<br>0.5<br>0<br>6 7 8 9 10 11<br>GDP per capita (log)<br>R&D (% of GDP)<br><!-- End of picture text --> Are these large differences in R&D performance significant for economic performance? Is formal R&D important only for a few advanced economies like Korea, while most developing countries need only focus on absorbing advanced knowledge from abroad, for example through openness to trade and foreign investment? The study by Lederman and Maloney (2003) also estimates the impact of R&D intensity on total factor productivity growth for a sample of both developed and developing economies. They find that a one percentage point increase in R&D intensity is associated with a 0.78 percent rise in TFP growth – in effect a 78 percent social rate of return on R&D investment.<sup>21</sup> Earlier studies for the United States and other OECD countries also find high social rates of return on R&D.<sup>22</sup> Compared to 20 Jaumotte and Pain (2005a) also provide an extensive analysis of the determinants of business sector R&D in the OECD countries. Among the more important influences on business R&D are economic framework variables such as the user cost of capital, corporate profits, financial development, international trade openness and product market restrictions (lack of competition). Among significant national innovation system variables are government subsidies for business R&D (although only in some conditions), the level of non-business R&D (largely in universities and non-profit bodies), business-academic linkages and a lagged term for the number of scientists and engineers. 21 The term social here indicates that the returns measured include not only private returns to the firm making the R&D investment, but also the benefits for others generated by R&D spillovers or externalities.

> 22  For example Griliches (1992, 1995) and Jones and Williams (1998).

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