The Contribution of Innovation to Productivity and Growth in Korea

What has been the contribution of industrial innovation to economic growth? Typically, the issue has been approached with growth-accounting methods augmented to include a “stock of knowledge”. An independent estimate of the rate of return to R&D is found in order to impute patents granted to the accumulation of knowledge. Griliches(1973) then uses a regression approach to assess the effect of an R&D variable on the computed TFP growth rate. The regression coefficent on the R&D variable would provide an estimate of the social rate of return to R&D. The studies tend to show high social rates of return to R&D, typically in a range of 20 to 40 % per year. We need to provide multiple equation dynamic system for productivity and innovation in Korean economy in state space form. A wide range of time series models, including the classical linear regression model and ARIMA models, can be written and estimated as special cases of a state space specification. State space models have been applied in the econometrics literature to model unobserved variables. Estimation produces some interesting results. Considering the goodness of fit, we can see that the evidence is strongly in favor of the range 0.12~0.135 for the elasticity of TFP to R&D stock in the period between 1970's and the early 2000's.