The study presents the positive external effects (spillovers) of investments in research and development in manufacturing industries, in Israel and abroad. This examination quantifies the spillover of domestic and imported technologies, through intermediates and capital goods, to establishments that did not participate directly in the research and development process. The analysis examines the interactions between knowledge and R&D variables—including variables that are self-produced knowledge and those that spill over from outside. These interactions are examined among the variables themselves and between the variables and productivity, wages, and exports in the industry.
The estimates are based on a comprehensive data set of fixed prices for seventy-seven aggregate groups (three digits) for the 1990–1994 period. The framework of the analysis is the Cobb-Douglas production function, “input-output coefficients,†and a simultaneous model in which output, R&D, capital, and exports are determined together and influenced by spillover, among other things.
The findings indicate that for manufacturing industries in Israel, as in other industrialized countries, R&D spillover has a considerable and significant impact on output and productivity. This finding applies to local R&D and to R&D produced in countries with which Israel maintains trade relations. Both types of R&D spillover were found to have a strong positive influence on self-produced R&D, as well as on wages in the industry and, indirectly, on exports. In fact, acquisition of knowledge and patents from other industries and from abroad contributed positively toward product and total productivity. Not surprisingly, the impact of spillover focused on high-tech industries, in which self-produced R&D and human capital are relatively high.
The rates of return on gross physical capital came to about 14 percent on average, as against 20 percent for (gross) capital from self-produced R&D in the industry. If the estimated returns from spillover are added, in which rates are higher than the direct impact of self-produced R&D according to the findings of the study, then the total social rate of return on investments in industrial R&D (both direct and indirect) will reach 40–50 percent per annum. This reflects the high relative profitability of capital formation in manufacturing R&D. From the perspective of the economy, there is a lack of investment in knowledge, innovation, and, apparently, in human capital as well. This phenomenon is understandable in case where manufacturers receive less than half of the return exchange for their investments in R&D, and the remainder of the return is allocated as a gift to other manufacturing firms.
