Macroeconomic Modelling of Public Expenditures on Research and Development in Information and Communication Technologies

Since the 1990s, information and communication technology (ICT) has been an essential driver of economic growth. Between 1995 and 2010, the ICT sectors have accounted for over 20% of EU15 growth, even though they only constitute 5% of EU15 GDP. The high growth resulting from the ever-increasing pace of ICT-related innovation requires high levels of R&D to be sustained. Indeed, the European ICT sector accounts for over a quarter of overall business expenditure on R&D, which makes it the largest R&D investing sector. A set of EU policy initiatives emphasise the importance of ICT and the underlying R&D for boosting European performance and competiveness. In order to ensure that public policies create the right conditions for sustaining and increasing the support for R&D, an appropriate measuring framework based on the thorough review of the best available methodologies need to be devised. Such framework will serve as a tool for choosing the investment strategies of public spending that create a favourable climate for an increase of private spendings on ICT R&D, and to turn investments into economic growth and employment through innovation. This report aims to provide an overview of subjects and topics relevant for constructing a coherent framework for macroeconomic analysis of the impact of public spending on ICT R&D, and to set specific modelling requirements for such a framework. The overview is structured to resemble the sequential multistage causal process which links R&D policy intervention with the resulting economy-wide effects, and covers the following issues: relationship between public and private R&D expenditure, innovation and the R&D process, and diffusion and impact of ICT. Further, building on the theory reviewed and empirical evidence presented, the report identifies the general requirements for a modelling framework to be used for ICT R&D analysis. Since there are existing models which can be used as a base framework, the guidelines focus on the specific requirements for the development of an R&D module. This add-in module is called to provide specific initial solutions to account for economics of ICT R&D, and need to be fully integrated with the base CGE model.