final paper for seminer

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EFFECTS OF RESEARCH AND DEVELOPMENT ON

GROWTH AND PATENT RATES

UMIT YILMAN

Department of Economics

˙Izmir University of Economics

E-mail:[email protected]

January 23, 2009

Econometrics Project

Course: Econ 301-Econometrics

Instructor: Assist. Prof. Efe Postalcı

Term: 2008 Fall

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ABSTRACT

In my paper readers will have ability to understand the effects of research and development

on growth rate and patent rate. For this reason especially why some countries make so much

investment on research and development. Also, I will try to explain that why research and

development is the main point of the growth rate and patent rate.

Research and development is making some scientific researches on some serious areas, and

also growth rate is financially development of a country or a corporation. Additionally, patent

is right which is given for individuals to protect his of her copyright.

The other studies which are about research and development have discussed same discussion;

and also I will try to discuss my research with more detail..

1.INTRODUCTION

One of the most important things which provide increasing the growth rate to countries is

research and development. There are three reasons why research and development are so

significant, in order to innovate important things, and to become a leader on some areas, and

to prevent from custom manufacturing we need research and development. Additionally,

research and development is the most effective part to obtain the technology for nations.

However; research and development cause higher costs, it provides the most significant things

for people to get best one for themselves. Why research development is important because of

we as people need new things, and also customers need more efficient ones, and also

institutions need to be best in their professionalism so research development is so important.

The best research and development provides more growth rate and also more patent rate. If

people on research and development areas continuously improve your selves they always

become the best what they are working on.

At the beginning, my variables are research and development and growth rate and patent

rates. Growth rate cannot be considered without becoming research and development. Growth

rate depends on what you are doing on certain areas and also what is your best product or are

you monopoly or the first maker of something. Research and development help firstly to find

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important inventions or innovations. Why do people need it? Because, if research and

development are not enough developed people cannot invent something or people cannot

innovate. Research and development provide increasing growth rate also it helps to expand to

economical activities. For example, research and development create new jobs. Whereas,

research and development cause losing some jobs, it helps to arise new and better ones.

Research and development provide better ways to economy, so the economy's growth rate

obviously and positively affects from it.

Next one, if we consider developed countries they do never give concession, because they

know that without research and development nothing is going to happen. For example, if

research and development level is so low, we can make our works without helps of the other

countries or people. Furthermore, research and development are the main point of economy.

For example, as you are technology company has made new device, but it is new and easy and

efficient way to do your works and it helps to more efficiently to other companies; so you are

preferred by the other ones. Additionally, research and development affect investment rates,

because when some new things have found they obtain new factories also new investments.

For example, when computers have invented new factories were established, and new job-

steps have arose, also have been continuing to arise.

Finally, research and development is a kind of creating new idea which is effective for the

time period, and interesting, and helps to cover the requirements of people. For example, if

research and development becomes effective in time period that it can invent seriously very

important thing, so it gains economical efficiency. After that, step by step it helps to increase

the investments rates; by the help investment rates growth rate increases. What's more some

nations give serious importance to research and development to make their selves better and

to become more developed than other nations. Additionally, research and development which

is source of any single thing is also our expectations' source. When people firstly start to do

new thing which is never innovated or invented thing before is a kind of research and

development. Whenever people want to start to do something if they want to be successful on

their aim they always need research and development; because, without research and

development they spend more money, and their rate of make loss increases whereas there is

not to make loss. However, research and development always does not provide success, so

people or nations should consider it. Moreover, research and development is our expectation's

source because we as human did not demand something or we did not need new things the

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research and development would not have arose that's why research and development is our

expectations' source.

2. LITERATURE REVIEW

The relationship between research and development and growth rate and patent which are

main dynamics of economy are so related on each other.

According to 'Levine (1997) and Beck et al. (2001) and Wachtel, the relationship between

financial development and economic growth is related with their developments. Without

becoming research and development which provides continuity of technology financial and

economical growth automatically stops. Why? Because, technology is consists of changing

old with new one; but if you do not have research and development you cannot change, I

mean that you cannot innovate or you can not invent any kind of technological modernity.

According to 'Allen and Gale (2000) the development of technology is highly related on

accumulation of information. Why? Because, technology helps to information become wider

and larger. By the help of technology information can access to everywhere. When

information access to everywhere it helps to develop each other and this structure continues

by the help of research and development. After that this structure also helps to increase of

patent registrations.

According to Rajan and Zingales (1998) by the help of research and development industry

level data is strongly related on development. Why? Because, research and development

influences the industrial data and also industrial data influences the financial growth.

According to Beck and Levine (2002) the growth in industries depends on external finance,

because of lack of economical activity needs new sources. Why? Because, research and

development cause creating external finance for growth in industries; so, growth in industries

is results of research and development.

According to Kwan and Lai (2003) a variety- expanding growth model of effective patents

provide significant increase in research and development after that it provides welfare gains.

Research and development and growth rates affect from each other. In the United States

patent rates have extended from 1861 to 1995, the extended years are result of TRIPS

agreement. Actually, Kwan and Lai (2003) have tried to show the effect of patents have

leaded to more research and development.

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According to Levine (1997) banking sector and the extent of stock market activity are

related with future economic activity growth; so the banking sector and the extent of stock

market can growth their selves by the help of research and development. Levine and Zervos

(1998) have tried to give attention on what the future economic growth is related with. The

banking sector cannot be separated from research and development, because when time to has

come if you do not give importance on research and development you can well-developed.

According to Cetorelli and Gambera (2001) mention same discussion which is about Rajan

and Zingales with modification of that they control over role of structure of banking system

and finance system. And also, Cetorelli and Gambera (2001) have studied on external finance

growth and banking system. Research and development modifies banking the banking system

and finance to increase growth of economy.

3. MODEL SPECIFICATION

,

We will using an model where RD is the rate of research and development 1is the rate of

growth, and where 2 is the rate of patent

RDi=0+1GR +2PR

My independent variable is research and development and patent rates that affect changes

of growth rate. If research and development increases level of growth rates and level of patent

rates automatically increase. Because, increasing research and development rate means that

increasing level of technology, and also it means that financial development and also

development of welfare, technology that is the most effective thing in people's life changes

people life expectancy. For example, when people had found new devices to hunt in medieval

age their life style meaning their life expectancy changed. Additionally, research and

development changes technology this provides more financial development for people. For

example, when tractor were had invented, farmers' financial status has changed and also their

social life status has changed. So, when a person's economical status changes their welfare

changes. Besides, these invention examples are more and more that I mentioned previously.

As well as invention rates increase step by step the patent rates increase. So, we understand

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that research and development is main source of growth rate and patent rates.

I expect the signs can be positive or negative; because if research and development rates

increase growth rate and patent rate can increase, if not growth rate and patent rate can

decrease. Possibility decrease of growth rate and patent rates' coefficients are related on

research and development; I mean that research and development's coefficient is kind of

continuously increasing coefficient.

4. DESCRIPTION OF DATA

All data were downloaded from their web sites. Research and development data were

obtained from the official web portal of OECD. The data of research and development had

saved as pooled country by country on the official web site of OECD. Also this data are

2003's data on official OECD MSTI data base.

On my paper data are the pooled data series which were listed on OECD web site as

country by country. The pooled data show that what the relative difference between countries

and how the data affect each other. I wanted to resolve above pooled data series of research

and development, and growth rate, and patent rate of these countries;

MY DATAS

RD GR PR

Sweden 0.0427 0.08 0.02

Finland 0.0349 0.015 0.05

Japan 0.0315 0.025 0.17

Denmark 0.0262 0.05 0.08

U.S. 0.0259 -0.025 0.28

Germany 0.0251 0.01 0.2

Austria 0.0237 0.495 0.01

Belgium 0.0237 0.493 0.01

France 0.0215 -0.05 0.06

U.K. 0.0189 0.05 0.05

Netherlands 0.018 -0.025 0.03

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Slovenia 0.0154 0.03 0.0001

China 0.0131 0.0995 0.03

Czech Republic 0.0126 0.01 0.0014

Italy 0.0116 0.0494 0.04

Ireland 0.0112 -0.01 0.0019

Spain 0.0105 0.05 0.07

Hungary 0.0095 0.06 0.0016

Portugal 0.0079 -0.05 0.0008

Estonia 0.0077 0.0994 0.0005

Lithuania 0.0068 0.0495 0.0008

Greece 0.0061 -0.03 0.0009

Slovakia 0.0058 -0.04 0.0002

Latvia 0.0056 -0.05 0.0001

Cyprus 0.0032 0.095 0.0001

5.EMPRICAL RESULTS

BAR GRAPHS OF DATA AND SCATTER with REGRESSION GRAPHS:

-0.1

0

0.1

0.2

0.3

0.4

0.5

0.6

Sweede

n

Finlan

d

Japa

n

Denmar

kU.S

.

Germ

any

Austri

a

Belgium

Franc

eU.K

.

Nether

lands

Slovenia

RD

GR

PR

8

-0.06

-0.04

-0.02

0

0.02

0.04

0.06

0.08

0.1

0.12

China

Czech

Rep

ublic

Italy

Ireland

Spain

Hunga

ry

Portu

gal

Eston

ia

Lith

uania

Gre

ece

Slova

kia

Latvia

Cypru

s

RD

GR

PR

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6Series: LOG(GR)Sample 1 25Observations 17

5

4 Mean Median Maximum Minimum Std. Dev. Skewness Kurtosis

-2.901525-2.995732-0.703198-4.6051701.0990220.4384013.054361

3

2

1Jarque-BeraProbability

0.5466480.760846

0

-5 -4 -3 -2 -1

6Series: LOG(GR)Sample 1 25Observations 17

5


-2.901525-2.995732-0.703198-4.6051701.0990220.4384013.054361

3

2


0.5466480.760846

0

-5 -4 -3 -2 -1

11

6Series: LOG(PR)Sample 1 25Observations 25

5


-5.051902-4.605170-1.272966-9.2103402.589028-0.2541411.705721

3

2


2.0140730.365300

0

* -9 -8 -7 -6 -5 -4 -3 -2 -1

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ESTIMATED REGRESSION

Dependent Variable: RDMethod: Least SquaresDate: 01/26/09 Time: 16:29Sample(adjusted): 1 25Included observations: 25 after adjusting endpoints

Variable Coefficient Std. Error t-Statistic Prob.

C 0.011880 0.002310 5.142802 0.0000GR 0.023244 0.013156 1.766791 0.0911PR 0.079108 0.025673 3.081320 0.0055

R-squared 0.333614 Mean dependent var 0.016764Adjusted R-squared 0.273034 S.D. dependent var 0.010349S.E. of regression 0.008824 Akaike info criterion -6.510627Sum squared resid 0.001713 Schwarz criterion -6.364362Log likelihood 84.38284 F-statistic 5.506961Durbin-Watson stat 0.448244 Prob(F-statistic) 0.011508

Estimation Command:

=====================

LS RD C GR PR

Estimation Equation:

=====================

RD = PR*C(1) +GR*C(1)+C(2)

Substituted Coefficients:

=====================

RD = 0.079108*PR+ 0.023244*GR+0.011880

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The equation means that; if we raise the R&D rate one unit, the growth rate will increase

0.023244units.

The equation means that; if we raise the R&D rate one unit, the patent rate will increase

0.079108units.

THEORY and R²: There is an inverse relationship

between the variables and the estimation also shows the same result. The R-squared have

better to be more than 0,8 but it is 0,33.

HYPOTHESIS TESTING

T-test

Ho: ı=0

Hı: ı0

=0.05 level of significance

degrees of freedom(d.o.f)=n-k-1=25-2-1=22

t-critical=2.074

t-statistic=1.766

Since the t-statistic is smaller than the t-critical, it falls into the shaded area, i.e, rejection

area and the null hypothesis is rejected which means that the R&D rates significantly affect.

F-TEST

Ho: ı=0

Hı: ı0


F-statistic=5.506

F-critical=F k(v1),n-k-1(v2)=F2,22=5,72

Since the F-statistic is smaller than the F-critical, it falls into the shaded area, i.e, rejection

area and the null hypothesis is rejected.

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If we check RRT table we can see that there is an optimal omitted variable or variables. I can assume that the patent rates are other major criteria to scale the growth rate.

F-statistic Log likelihood ratio

RAMSEY RESET TEST3.777629 Probability12.03881 Probability

0.0437840.007251

Test Equation:Dependent Variable: LOG(GR)Method: Least SquaresDate: 01/23/09 Time: 01:35Sample: 1 25Included observations: 17Excluded observations: 8


CLOG(PR)

PRFITTED^2FITTED^3FITTED^4

R-squaredAdjusted R-squaredS.E. of regressionSum squared residLog likelihoodDurbin-Watson stat

-471.0310 196.0388 -2.402743 0.0351133.7802 53.47445 2.501760 0.0294

-10797.95 4313.635 -2.503215 0.0293331.0418 136.9769 2.416770 0.034262.47442 26.79704 2.331392 0.03984.336947 1.931102 2.245841 0.0462

0.653430 Mean dependent var -2.9015250.495899 S.D. dependent var 1.0990220.780307 Akaike info criterion 2.6123056.697662 Schwarz criterion 2.906380

-16.20459 F-statistic 4.1479281.539115 Prob(F-statistic) 0.023067

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SEMI-LOG VS. DOUBLE LOG FUNCTION

At the beginning, I took the logarithm of my independent variables, in order to see the any

change in growth rate 1% change in research&development rates and patent rates.

Dependent Variable: LOG(GR)Method: Least SquaresDate: 01/23/09 Time: 23:15Sample(adjusted): 1 25Included observations: 17Excluded observations: 8 after adjusting endpoints


C -1.444486 1.897866 -0.761110 0.4592LOG(RD) 0.245396 0.425953 0.576112 0.5737PR 10.03524 4.838739 -2.073937 0.0570

R-squared 0.242408 Mean dependent var -2.901525Adjusted R-squared 0.134180 S.D. dependent var 1.099022S.E. of regression 1.022634 Akaike info criterion 3.041425Sum squared resid 14.64091 Schwarz criterion 3.188462Log likelihood -22.85211 F-statistic 2.239797Durbin-Watson stat 2.378561 Prob(F-statistic) 0.143235

Estimation Command: ===================== LOG(GR) C LOG(RD) PR

Estimation Equation: ===================== LOG(GR) = PR(1)*LOG(RD) +PR(1) *C(1)+C(2)

Substituted Coefficients: ===================== LOG(GR) = -1.444486*LOG(RD) – 1.444486*(-10.03524)+ 0.245396

The equation means that; if we raise the research development rate one unit growth rate will

increase 0.245396 and also if patent rate raise growth rate decreases

-10.03524.

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R-SQUARED AND THEORY:

The theory has inverse relationship between the variables and estimation. The R-squared has

to be more than 0.8 but it is less than 0.8 and also it is 0.242.

HYPOTHESIS TESTING

Ho: ı=0

Hı: ı0


degrees of freedom(d.o.f)=n-k-1=25-2-1=22

t-critical=2.074

t-statistic=0.576

Since the t-statistic is smaller than the t-critical, it falls into the shaded area, i.e, rejection area

and the null hypothesis is rejected which means that the R&D rates significantly affect.

F-TESTHo: ı=0

Hı: ı0


F-statistic=2.239

F-critical=F k(v1),n-k-1(v2)=F2,22=5,72

Since the F-statistic is smaller than the F-critical, it falls into the shaded area, i.e, rejection

area and the null hypothesis is rejected.

At the analyzing the model, it is resulted that for every 1 % increase in research and

development rates and patent rates, growth rate will increase 0.245296 and 10.03524

respectively patent rates.

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MULTICOLLINEARITY

What is the collinearity? It is a linear relationship between two variables which explanatory

variables and these are collinear when there is an exact linear relationship. What is the

multicollinearity? Multicollinearity is being correlated of two or more explanatory variables

in a multiple regression model. In order to easily catch on if there is multicollinearity or if not,

we have to analyze the predictor variable because if it is added or deleted, there will be big

changes in the estimated regression coefficients. I selected better way to see the result in an

easy way, I selected to use correlation matrix.

Correlation Matrix

GR PR RD

GR1.000000 -0.179878 0.214529

PR-0.179878 1.000000

0.488940

RD 0.214529 0.488940 1.000000

According to table, there is no correlation between growth rate and research and

development rate and patent rates.

BREUSCH-GODFREY SERIAL CORRELATION LM TEST

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F-statistic

Generally the serial correlation is used in order to specify the probability is a specification

criteria for. If the p-value is smaller than 0.05, we can conclude that there is an

autocorrelation. Since my p-value is 0,862429, there is no a serial correlation in my model.

DURBIN-WATSON TEST

This is a test that explains whether the residuals from a linear regression or multiple

regression are independent. The method is this test as follows:

H 0 : = 0

H 1 : > 0

Upper and lower critical values, d U and d L have been characterized for different

values of k (the number of explanatory variables) and n.

`Godfrey Serial Correlation LM Test:

F-statistic Obs*R-squared

0.739181 0.914616

Probability Probability

0.405499 0.338893

Test Equation: Dependent Variable: RESID Method: Least Squares Date: 01/23/09 Time: 01:52 Presample and interior missing value lagged residuals set to zero.

Variable

C LOG(PR)

PR RESID(-1)

R-squared Adjusted R-squared S.E. of regression Sum squared resid Log likelihood Durbin-Watson stat

Coefficient

-0.000680 0.005250 1.088086 0.290957

0.053801 -0.164553 0.994849 12.86643

-21.75392 2.797529

Std. Error

0.944944 0.147805 6.293602 0.338418

t-Statistic

-0.000720 0.035520 0.172888 0.859756

Mean dependent var S.D. dependent var Akaike info criterion Schwarz criterion F-statistic Prob(F-statistic)

Prob.

0.9994 0.9722 0.8654 0.4055

7.38E-16 0.921887 3.029873 3.225923 0.246394

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If d < d L reject H0

If d > d U do not reject H0

If d L < d < d U test is inconclusive.

=5% level of significance

N=25

k=3

After looking at the critical values of Durbin-Watson statistic, I found that d L as 1,12 and

dU as 1,66. My Durbin-Watson statistic is 2,797529 and thus I can say that H 0 is not rejected

since d U <d.( The errors are not positively autocorrelated.)

5-CONCLUSION

In conclusion, time is using research and development, without research and development

any kind of growth cannot be considered; so we all as nations should never forget the real

place of research and development in our life. Research and development are sources of easy

ways in people's life. When people have considered doing their work easily, and efficiently,

and fast research and development have been main point of them.

This paper describes that how the research and development and patent rates affect the

growth rate of country. Also I reached to my aim. After all the research I conclude my work

paper works on my model.

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BIBLIYOGRAFY

[1] W. Carlin, C. Mayer Journal of Financial Economics 69 (2003): Publisher info.191-

226.

[2] Levine, R., Zervos, S. Stock Markets, banks and economic growth.American

Economic Review 88,

537-558. 1998.

[3] Allen, F., Gale, D. Comparing Financial. MIT, Cambridge, MA 2000.

[4] Rajan, R., Zingales, L. Financial Dependence and Growth. American Economic Review

88, 559-586

1998.

[5] Beck, T., Levine, R. Industry Growth and capital allocation: does having a

market-or bank-based

system matter? Journal of Financial Economics 64, 147-180 2002.

[6] Kwan, Yum K.,and Lai, Edwin L., C. Intellectual Property Rights Protection and

Endogenous Eco-

nomic Growth Journal of Economic Dynamics and Control vol.27, p.853-873 2003.

[7] Levine, R. Financial Development and Economic Growth: views and agenda Journal of

Economic

Literature 35, 688-726 1997.

[8] Cetorelli, N., Gambera, M., 2001 Banking Market structure, financial dependence and

growth: internatioanl evidence from industry data. Journal of Finance 56, 617-648 2001.

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