# **<mark>Exhibit 18</mark>**

<!-- Start of picture text --> Post-Secondary Education and GDP per Capita<br>(5-Year Intervals between 1975 and 2000)<br>35<br>United States<br>30<br>25<br>Australia<br>20<br>Korea<br>Philippines<br>15<br>Japan<br>Thailand<br>10<br>Indonesia<br>China Hong Kong<br>5<br>Malaysia<br>0<br>6 7 8 9 10 11<br>GDP per Capita (PPP, Log)<br>(% of Population Aged 25 and Over)<br>Post-Secondary Education Completed<br><!-- End of picture text --> <mark>Source: Barro and Lee (2000) and World Bank.</mark>

# **_Government Support for Innovation Activity_**

So far this section has mostly covered broad policy areas like maintenance of macroeconomic stability, financial sector development and human capital development that, while they are expected to promote innovation and technology transfer, are also expected to have other wider economic and social benefits. Now we look at more specific policies that aim to foster innovation through targeted fiscal incentives or regulations. The theoretical rationale for direct public interventions of this type derives from the possibility that they might help offset market failures associated with knowledge, for example non-excludability, which make it difficult for private firms to appropriate all the returns from their R&D investments, leading to less than optimal innovation activities. Such problems are likely to be particularly significant for basic research that provides the early seeds for a variety of innovations by many firms, or which help countries better access the global pool of knowledge. We look at four types of policies.

_Support for science and university/public sector research_ . As Table 5 above indicates, the public sector in developed countries provides about one third of R&D funding, on average 0.60.7 percent of GDP, including funding for basic scientific research undertaken by universities or public sector research laboratories and institutes. In East Asia, public funding for R&D reaches this level of GDP only in a few advanced economies like Korea, Singapore and Taiwan (China).

There is a good deal of evidence for the positive effect of R&D funded or performed by universities and the public sector on both overall productivity and on business R&D. As noted above, Guellec and Pottelsberghe de la Potterie (2004) find the positive impact of university and public R&D stocks on productivity growth in OECD countries to be even larger than that of business R&D stocks. Jaumotte and Pain (2005b) also find that non-business R&D spending has a significant impact on growth in business R&D stocks in OECD countries, with a couple of qualifications. First, the impact of public and university R&D is likely to depend on the quality of links between these sectors and the business R&D sector, which uses the results of more basic research to develop commercially valuable products. Second, a greater volume of public sector R&D can “crowd out” business R&D by pushing up wages for scientific and technical staff. The latter could be a particular concern in developing countries where such specialized skills are in scarce supply. At least in OECD countries, the overall impact of non-business R&D on business R&D remains positive, even after taking crowding-out effects into account.

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