10% higher R&D expenditure = 4% GDP growth: The correlation between innovation and economic growth

Throughout 2000-2016, Egypt’s gross expenditure on R&D reached $6 million.

China and India are known as the centers of innovation, Today, innovation has become one of the Sustainable Development Goals (SDGs), calling on countries to “build resilient infrastructure, promote inclusive and sustainable industrialization and foster innovation.” This should be done through increasing spending on research and development (R&D) activities. 

In her paper on “Innovation and economic performance in MENA region,” Cairo University’s Noha Sami Omar looks at the association between and interdependence of the variables in the region from 2000-2016. Innovation is measured by the gross expenditure on R&D and economic performance is evaluated based on the real GDP of Egypt, Iran, Kuwait, Saudi Arabia, Turkey and Tunisia. 

Omar explains that despite the region moving towards knowledge-based economies, the countries remain mono-sectoral – either dependent on oil or tourism – and vulnerable to shocks. “[These countries] succeeded to a great extent in improving their ICT sector, but unfortunately, it has not yet been translated into a developed and mature innovation sector,” the paper highlights. 

The changes in economic growth
Between 1993 and 2010, the average annual growth rate in MENA countries amounted to 4% – just above Latin America’s 3% and below South Asia’s 6.4%. “The positive average GDP growth rate in MENA is basically attributed to the favorable global economic trend characterized by growth in the oil market prices, the development of tourism, an increase in foreign investment and immigrant remittances,” the paper states. 

The so-called Arab Spring pushed the annual growth rate down, dropping from 5% in 2011 to 2.5% in 2015. The year 2016 witnessed an upsurge (4.6%) due to the growth witnessed in oil-rich countries, before a decline in oil exporters’ economic activity caused a slump to 1.8%. 

MENA’s position in R&D and innovation
In 2015, R&D intensity in the region was estimated at 1%, compared – for instance – with Europe’s 2%. Throughout 2000-2016, Egypt’s gross expenditure on R&D reached $6 million. Around 90% of R&D spending comes from the public sector in MENA, compared to about one third in Europe. In terms of patent applications and scientific research, the region gravely lags behind Latin America and East Asia. However, MENA has a much higher rate (61%) of local patents – as in patents that are filed by residents – than the other regions. 

“The modest innovation performance in MENA […] could be attributed to four factors: economic diversification, labor market inefficiency, poor quality of educational system and private sector role in R&D,” Omar explains. Based on a mono-sector services economy, the high unemployment rate and lack of labor market participation and efficiency is part of the problem standing in the way of fruitful innovation in the region. Hence, education is key. Factually, the MENA region enjoys a very high enrollment rate; however, the issue lies in the quality of education. Moreover, the high dependence on the public sector to fund innovation can backfire. In order to close the technological gap between developed and emerging economies, the private sector needs to get involved. 

How relevant is innovation for economic growth?
The study finds that R&D expenditure is positive and statistically significant in explaining GDP; however, the relationship is weak. This means that – in MENA – a 10% increase in R&D expenditure raises GDP by 4%. This weak association could be due to limited R&D investment in the region.

Moreover, human capital, labor force and fixed capital accumulation are found significant in determining real GDP – in a nutshell, innovation and education are both essential to foster economic growth in the region. 

“The results suggest that R&D spending and human capital contribute strongly to the economic growth of MENA countries,” Omar concludes. “Therefore, MENA governments should support R&D sector in institutions and industries, and encourage the private sector’s contribution in the innovation sector to promote higher growth, living standards and social welfare.”

More tags : ,

    Knowledge Partners

    CONTACT US

    School of Business
    American University in Cairo
    AUC Avenue – P.O. Box 74
    New Cairo 11835
    Egypt
    Email: BusinessForward@aucegypt.edu

    Copyrights © 2017 The American University in Cairo School of Business • All Rights Reserved

    Copyrights © 2017 The American University in Cairo School of Business • All Rights Reserved