ICT R&D in regional analysis with Rhomolo

This study aims to analyse the impact of increased ICT R&D public spending on the European economy using the regional RHOMOLO model. The theoretical motivation for this research stems from ongoing discussion on the complementarity and substitutability between public and private R&D spending, and on the impact of R&D investment on growth and employment. We aim to contribute to this discussion by looking at the ICT sector and by providing theoretical and empirical evidence of the effect of the increased public ICT R&D on private ICT R&D, and its economic impact on economy as a whole. The policy background for the study, as formulated by the recently adopted Digital Agenda for Europe (DAE), re-emphasises the importance of ICT for boosting European performance and competiveness. DAE, a part of Europe 2020 strategy1, identifies areas where ICT can contribute toward European development and sets relevant targets. The target with respect to ICT R&D is a doubling of public expenditure on ICT research in ways which leverage equivalent increases in private spending on ICT R&D. With this study we expect to provide theoretical and empirical reasoning for this policy initiative.For the purpose of this study we will draw a distinction between two types of R&D input by separating ICT R&D and non-ICT R&D components. Such a division of the aggregate R&D expenditure brings two important benefits. First, the division allows for a consideration of the specific mode of impact of ICT R&D. The specificity of ICT R&D relates to it's pervasiveness across the economy (as a General Purpose Technology) and implies that any innovation resulting from ICT R&D expenditure will benefit many downstream industries, which is not necessarily the case for other types of R&D innovations. Second, accounting for the current regional distribution of ICT R&D expenditure will allow for allocation of the assumed growth of ICT R&D across regions with further, model consistent, economic implications. In the paper we will provide theoretical grounds for such a division by elaborating on the nature of innovation production and utilization. We will build our empirical analysis using the RHOMOLO (CGE) model. The RHOMOLO model is a spatial general equilibrium model with inter-regional trade and location choice based on microeconomics, using utility and production functions with substitution between inputs. The model has a detailed geographical dimension (NUTS2). In the model the R&D expenditure is an important factor affecting semi-endogenous technical change, along with technological knowledge and human capital stocks, and it is through this mechanism that most of the competitiveness benefits are expected to take place.