Analysis of Private R&D Effects in a CGE Model with Capital Varieties: The Case of the Czech Republic

In view of the increasing importance of private research in the Czech economy and elsewhere in Europe, this paper attempts to quantify the effect of private R&D on economic growth by applying a Computable General Equilibrium (CGE) model which incorporates the effects of capital varieties following Romer’s theory of endogenous growth. It was discovered that the dynamics of GDP growth are positively related to the production of capital varieties and the elasticity of substitution between homogenous and variety capital. For the Czech Republic, a small and export-oriented economy, support for private R&D can be particularly beneficial since it stimulates the exports of important industries. However, with regard to households, a policy of stimulating R&D could cause short-term adverse effects due to growing unemployment resulting from the substitution of labor for capital varieties.