How R&D Spending Boosts National Competitiveness

Numerous studies have shown that business investment in plant and equipment is a critical determinant of a nation's economic growth and prosperity. By contrast, the impact of private investment in research and development on national productivity has received relatively little attention.

Just how unfortunate that omission may be is underscored by the surprising results of a new study by economist Frank R. Lichtenberg of Columbia University's business school. Lichtenberg looked at the relationship between levels of R&D investment and productivity growth rates and living standards in some 53 countries from 1960 to 1985. His analysis indicates that the rate of return on such intangible investment actually exceeds the return on expenditures for plant and equipment by a factor of as much as 7 to 1. That is, a dollar of private R&D investment appears to be seven times more potent in facilitating productivity growth and higher per capita income than a dollar of conventional capital investment.

Lichtenberg's analysis suggests that R&D has a high "social return" within a nation, with important spillover effects that improve productivity growth across industries. It also suggests that R&D spillovers across national borders tend to occur with a significant lag, allowing nations that foster a high level of such investment to maintain their advantage by constantly renewing their technological capital.