Towards an Efficient Use of R&D – Accounting for Heterogeneity in 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 paper assesses the relative efficiency of R&D expenditures for 26 OECD member countries and 2 non-member countries. As countries differ in their national innovation systems and states of economic development and industrialization, e.g. transition economies in Eastern Europe vs. Asian countries vs. Anglo-Saxon countries, the measurement of R&D efficiency needs to consider differences in the technology of knowledge production. The existing empirical literature on R&D efficiency mainly builds on a homogeneous technology frontier neglecting the importance to account for country-specific heterogeneity. This paper models technological differences in knowledge production among countries using a stochastic frontier model for panel data. Applying a latent class model for SFA, we find empirical evidence for two technological classes, a `capital-intensive' and a `labor-intensive' one. Assuming a common knowledge production technology, as has been done so far in the empirical literature, thus results in biased efficiency estimates.