R&D efficiency and heterogeneity - a latent class application for the OECD

Expenditures devoted to research and development (R&D) are scarce and thus need to be used as efficiently as possible given the financial constraints countries are facing. This article assesses the relative efficiency of R&D expenditures for 26 OECD member countries and two nonmember countries. As countries differ in their national innovation systems and states of economic development and industrialization, e.g. transition economies in Eastern Europe versus Asian countries versus Anglo-Saxon countries, the measurement of R&D efficiency needs to consider differences in the technology of knowledge production. By means of a latent class model for stochastic frontiers, we relax the assumption of a homogeneous technology frontier and model technological differences in knowledge production among countries. Empirical evidence suggests the existence of different classes stressing the importance of accounting for countries' disparities within R&D efficiency analysis.