Structure of R&D capital expenditure and national total factor productivity

Abstract

This paper examines the relationship between the structure of R&D fixed capital spending, measured as the ratio of the private sector to public sector R&D capital expenditure, and national total factor productivity. It employs South African data for the period 1965 to 2019. This study employs the non-linear distributed lag modelling framework to cater for non-linearities in the relationship. The findings, first, suggest that the ratio of private sector to public sector R&D capital spending has a positive effect on total factor productivity. Second, the structure of R&D capital spending has large asymmetric effects on national total factor productivity, with negative changes dominating positive changes. Negative changes in the structure of R&D capital spending negatively influence total factor productivity, but positive changes have positive effects. Both in the short run and the long run, cumulative multipliers indicate that negative changes in the structure of R&D capital spending dominate positive changes by a very large margin. The findings imply that the private sector must become more dominant than the public sector in R&D capital spending in the national system of innovation.

Keywords:

• <R&D capital expenditure
• non-linear autoregressive distributed lag model
• total factor productivity
• white paper on science and technology
• techno-military regime
• capital budget

PUBLIC INTEREST STATEMENT

Investing in research and development plays an important role in driving economic development. South Africa has been battling a declining share of private investment in research and development capital for nearly two decades. The purpose of this study is to examine the effect of the structure of research and development expenditure on fixed capital. The structure of research and development capital spending is measured as the ratio of private to public research and development capital spending. The paper finds that as the structure of research and development capital spending becomes more dominated by private spending relative to public spending, productivity grows faster. The study also found that when the structure becomes more public sector dominated, the decrease in productivity is much larger than the increase in the same if the private sector dominates spending. The implication for policy is that private sector spending on R&D must be encouraged.

Acknowledgments

The author would like to thank the anonymous reviewer who gave extraordinarily constructive feedback that broadened my thinking about the paper.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Additional information

Notes on contributors

Juniours Marire

Juniours Marire is a lecturer at Rhodes University in South Africa. My current portfolio of research focuses on the link between productivity and R&D expenditures, and fiscal policy and productivity, as well as the effect of finance-led growth model on productivity growth. The current paper contributes to this portfolio by examining the role of capital expenditure in the R&D domain, an area of investment that has not received much attention recently.