Impact of Research and Development Expenditures on Economic Growth: Evidence from Industrial Development in Pakistan and Comparison from (G7) Nations
Abstract: This study examines the impact of research and development (R&D) expenditures on economic growth, with a focus on industrial development in Pakistan and a comparative analysis with developed countries. Despite being the sixth most populous country, Pakistan faces significant challenges in achieving sustained growth. Using a panel least squares regression model, this study analyzes the data of eight countries over a period of 25 years, including Pakistan and seven G7 nations i.e. France, the United States, the United Kingdom, Germany, Japan, Italy, and Canada. The correlation results reveal that R&D expenditures positively and significantly impact GDP across these countries. The GDPs of the G7 countries are significantly higher to Pakistan, highlighting the potential for substantial economic gains through increased R&D investment. The model shows a high R2 and adjusted R2, explaining 88.79% of the variation in GDP, with significant predictors including research expenditures and the lagged GDP into R&D expenditure. These findings suggest that for Pakistan, increasing R&D expenditure could lead to notable improvements in GDP and overall economic performance. Recommendations to increase government allocation to R&D, focusing on key industries such as textiles, automobile, electronics, technological advancement and infrastructure, and implementing policies that encourage private sector investment in R&D. Additionally, enhancing academic research and providing a roadmap for policymakers to foster industrial and economic development in Pakistan.
Introduction: Pakistan’s contribution to global scientific research is a merely a less than 0.5%. This underinvestment in technology and technological improvement poses a good sized barrier to the country's economic development and social development. Even as science isrecognized as a critical motive force of increase inside the modern-day aggressive economy, countrywide efforts have been inadequate.The scientific and Technological studies division became based in 1964 to: (i) coordinate and enforce countrywide technological know-how and era guidelines; (ii) sell studies and apply its consequences; (iii) broaden, produce, and utilize nuclear strength; and (iv) manage medical and technological manpower. It oversaw the country wide technological know-how Council, the Council of clinical and commercial research, the Atomic energy commission, and the distance and top Atmospheric research Committee. On the grounds that 1972, the Ministry of technology and era (most) has served as Pakistan's number one organization for planning, coordinating, and directing clinical and technological projects. It's miles chargeable for launching 2100 packages and projects aligned with the countrywide schedule to foster a strong and sustainable technology and generation studies base, important for Pakistan’s socio-monetary development, in accordance with the Federal government policies of business 1973.The division is led with the aid of a Secretary and accommodates 176 personnel with an additional 17 dedicated to development projects. Its operations are divided among management & Finance Wings and 5 technical wings: (i) policy & Coordination, (ii) planning & improvement, (iii) era, (iv) global Liaison, and (v) Electronics Wing. Key areas of awareness include Human-useful resource improvement, era switch from Research and Development institutions and Universities to enterprise, and advancements in food &Agriculture, business evaluation, fitness, Electronics, Ocean resources, New substances, Biotechnology, Textiles, and prescription drugs. Industrial innovation is a crucial driver of economic growth and competitiveness, especially in today's rapidly evolving global market. The significance of research and development (Research and Development) expenditure in promoting business innovation is paramount, as it provides the foundation for technological advancements, increased productivity, and the creation of new products and processes. This study examines the impact of Research and Development expenditure on industrial innovation in Pakistan over a 25-year period. Additionally, it compares these findings with industrial development trends in more developed economies to derive actionable insights and recommendations for enhancing Pakistan's innovation landscape.Khan and Rehman (2013)’s study plays an important role in economic growth of a country through technological advancement and spillover effects. In Pakistan, Research and Development expenditure is primarily funded by the government through investments in higher education, with universities being the primary centers for research. Higher education funding significantly contributes to Research and Development efforts. Additionally, there are a few specialized Research and Development organizations in Pakistan.Research expenditure and quality have improved notably since the establishment of the Higher Education Commission (HEC) in 2001. Before the HEC's formation, annual publications in Pakistan were only 271 (ISI, 2010). This number nearly doubled by 1984-85, reaching 512 publications. The 2000s marked a significantdecade for research in Pakistan, with substantial increases in the number of publications, research organizations, and research expenditures. Publications rose from 1305 in 2000-01 to 7661 in 2008-09. Pakistan's business zone, appreciably its fabric enterprise, has historically been a sizable contributor to the country wide economy. but, inspite of its potential, the world has struggled with numerous demanding situations, consisting of outdated era, confined Research and Development investments, and a lack of innovation. These issues have impeded the arena's capacity to compete the world over, particularly towards countries like China and Bangladesh, that have made significant advancements in businessinnovation.Research and Development expenditure is a pivotal element in addressing these challenges. Investments in Research and Development lead to the development of latest technologies, tactics, and merchandise, which in turn force industrial boom and performance.The relationship among Research and Development and industrial innovation has been considerably studied in developed nations, revealing a clean advantageous impact on financial performance and competitiveness. However, there is a paucity of complete studies analyzing this courting in the context of Pakistan's business quarter.
Studies Questions
Data And Methodology 3.1. DataThis paper is based on secondary information and time series analysis for the period 1999-2023. The sources of information used in this research are extracted from the World Development Indicators and the State Bank of Pakistan.
Model Formation
Data?
This study employs a panel least squares (PLS) regression model to investigate the impact of research and development (R&D) expenditures on economic growth across various industrial sectors in Pakistan over the period 1999-2023. The PLS model is chosen because it allows for the analysis of both cross-sectional and time series data, making it particularly suitable for the type of dataset used in this research, which covers multiple industries over a prolonged period. This approach offers a more robust examination of the relationship between R&D investments and economic performance by accounting for variations across industries while also considering changes over time. Data Sources The data for this study is drawn from two primary sources: World Development Indicators (WDI): This dataset provides comprehensive global development data, including economic indicators such as GDP, inflation, and R&D expenditure. State Bank of Pakistan (SBP): Data from the SBP covers macroeconomic variables specific to Pakistan, such as sectoral growth, inflation rates, industrial output, and public R&D funding. Limitation: The chosen linear model may capture all complexities in the correlation? between R&D and economic improvement. Gaps in R&D expenditure data, especially for earlier years and specific industries.
Model Formation
GDPt=β0+β1REXPt+β2ΔIndlt?1+β3D1t+β4D2t+β5D3t+?t
where:
The comparison of Pakistan results with developed countries which are indicated as G7 countries. Equation for the panel least squares model can be summarized as follows:
GDPit=β0+β1REXPit+β2GRLit+∑j7=1 βj+4Dij+uit
where:
This equation captures the correlation among GDP and the specified independent/input variables across a panel of 8 countries observed over 25 periods. The model is estimated using panel least squares, which interprets the both cross-sectional and time-series analysis in the provided information.
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Model Interpretation
The coefficient for R&D expenditure is 74.21896, which indicates that, other factors being equal, a $1 million increase in R&D expenditure is associated with a $74.22 million increase in GDP. This finding is significant with a p-value of 0.0151. This effectiveness is based on data that highlights the positive impact of R&D on firm performance. For example, studies by Griliches (1995) and Jones (2002) highlight the important role of R&D in increasing productivity and economic growth. Under the adjustment conditions, growth in economic value added was associated with a $3.65 million increase in GDP. This effect is also significant with a p-value of 0.0208. This finding supports the idea that economic growth positively affects economic development. The results are consistent with the work of Acemoglu et al. (2006) and Bloom et al. (2010) showing that progress in trade and value added can have a positive effect on GDP growth. Compared to R&D expenditures, the magnitude reflects the difference between changes in the growth of the economy and the degree of adjustment. The F statistic is 54.82741 and the p-value is 0.0000, confirming the significance of the model for the entire model, which indicates that the variables largely explain the difference in GDP. The positive and positive impact of R&D expenditure on GDP indicates the importance of R&D investments in economic development. This finding supports policy recommendations to increase R&D investments to promote economic development. It reflects the results of empirical studies such as Hall and Van Reenen (2000), who found that more R&D investment leads to economic growth, including studies on economic development (e.g., Crespi and Tacsir, 2013) and the role of technological innovation in growth (e.g., Aghion and Howitt, 1998). The large impact on R&D expenditure suggests that policies to increase R&D expenditure can provide significant economic benefits to Pakistan.
Political period 2019 - 2023 (D1): The coefficient of 22047.31 indicates that, other conditions being held constant, GDP in this period was on average 22,047.31 million dollars higher than in the period 1999 - 2007. This positive result is significant (p value) = 0.0000). This finding is consistent with research showing the importance of a sustainable business environment in supporting entrepreneurship. For example, Keefer and Knack (1995) argue that political stability and effective governance lead to positive economic outcomes. National Electric Vehicle (EV) Act 2019: Focus on supporting research and development of electric and renewable vehicles to reduce emissions and promote efficient transportation. Pakistan Science, Technology and Innovation Policy 2021: Aims to strengthen the country’s R&D ecosystem in terms of digital transformation, new technologies (science, biotechnology) and business research replication. Smart R&D across sectors including health, agriculture and education to drive economic growth. Collaboration to solve national problems through innovation.
These regulations aim to enhance Pakistan’s global competitiveness through R&D and sustainable development using new technologies. However, financial constraints prevent them from reaching their potential.
Political period 2013 - 2018 (D3): The coefficient is 17327.52, which indicates that GDP during this period was $17,327.52 million higher than the previous period, with a p-value of 0.0000, indicating a significant surprise in the statistics. can have a long-term impact on business. For example, Alesina and Perotti (1996) discuss how changes in political culture can lead to different economic outcomes depending on the policy change. The positive impact during this period suggests that economic policies were beneficial compared to the time spent. Vision 2025: Launched by the Ministry of Planning, Development and Reform in 2014, this policy aims to make Pakistan one of the top 25 economies by 2025 by investing in research, technology and innovation. It talked about strengthening research and development in areas such as agriculture, power and industrial manufacturing and engineering. It aims to improve the quality of research in higher education, increase the number of doctorates and support the innovation ecosystem. Economics of scientific research. To work on developing the country's R&D strategy at international standards. Private Sector Limited Collaboration and collaboration between government institutions, academia and business is fragmented.
Political period 2008 - 2013 (D2): The coefficient of 6814.815 indicates that GDP increased by $68,148,150 in this period compared to the previous period, and the p-value of 0.0021 indicates Statistics significance. The magnitude of the coefficient for this period compared to these two periods may reflect changes in the economy or the impact of different policies. This is consistent with studies such as Rodrik (1999) who argue that the fiscal impact of political leadership may vary depending on specific policies implemented in and outside of business. National Science, Technology and Innovation Policy 2012: Focus on promoting science and technology in key sectors such as agriculture, energy, health and business, further strengthening R&D infrastructure, cooperation between education and industry, and commercialization of science. Higher Education (HE) measures: Continue to finance research projects, develop academic research, and support postgraduate research through scholarships, while creating excellent facilities in the fields of biotechnology, S&T and renewable energy. PCST: Provide science and technology advice to the government, evaluate R&D performance, and help align national policies with international needs. 0.25%), low private sector participation, and weak integration of education and business limit the effectiveness of policies during this period.
The analysis indicates that all three political tenures had a positive impact on GDP relative to the reference period of 1999 to 2007. This suggests a general trend of economic improvement under successive political leaderships. The significant positive effects during the tenures of 2019-2023 and 2013-2018 imply that these periods might have been characterized by favorable economic policies or conditions that contributed to higher GDP growth. The findings support the view that political leadership and stability can significantly influence economic performance. Previous research, such as that by Barro (1996), underscores the importance of political stability and governance quality in fostering economic growth. Additionally, the results are consistent with studies on the economic impact of political cycles (e.g., Persson and Tabellini, 2003), which emphasize that political leadership can shape economic outcomes through policy decisions. The establishment of HEC in 2002 under the leadership of Dr. Atta-ur-Rahman is one of the R&D policy changes of this period. HEC aims to develop the higher education system of Pakistan and to promote science and technology. The key elements of HEC’s R&D policy are:
Increased research funding: HEC provides funding for research in universities, especially in the fields of information technology, biotechnology and engineering. Faculty provides grants to national and international higher education (especially PhD) to further develop their research potential. Provide modern technology to universities. Despite these efforts, Pakistan’s R&D expenditure as a percentage of gross domestic product remains low and much of the focus is on untapped research.
In contrast, G7 countries have shown a strong commitment to R&D investment, typically at 2%–4% of GDP. These countries have implemented policies that encourage public and private participation in R&D, focusing on high-impact areas such as healthcare, renewable energy, intelligence, and advanced manufacturing. G7 governments support the innovation ecosystem through tax incentives, subsidies, and public-private partnerships. For example, the United States and Germany emphasize technological development and infrastructure, while Japan and the United Kingdom focus on innovation-focused industries such as electronics and biotechnology. Policies are always based on long-term business goals and aim to be globally competitive by investing more in research and development.
A regression analysis of the impact of research and development (R&D) expenditure on GDP in eight countries from 1999 to 2023 provides several important insights. The analysis shows that R&D expenditure is positively related to GDP with a coefficient of 6.818. This result indicates that, holding other factors constant, an increase in R&D expenditure increases GDP by 6.818 units. This finding is consistent with the results of Griliches (1998) and Mairesse et al. (2012) who emphasized the importance of R&D investment for economic growth through product development and technological performance.
The interaction term between lagged GDP and R&D expenditure shows a coefficient of 0.46, indicating a compounded effect of R&D on GDP over time. This supports the notion articulated by Nadiri (1993) and Jones and Williams (1998), who emphasize the delayed yet substantial impact of R&D on economic growth. Country-specific dummy variables reveal significant GDP differences compared to Pakistan, the reference category. Notably, the United States, Japan, and Germany exhibit considerably higher GDP levels, with coefficients of 1.07 billion, 329 million, and 221 million, respectively. These results are consistent with the literature on the substantial economic advantages held by developed nations with advanced R&D infrastructures (Aghion et al., 2015). The substantial GDP differentials highlight the disparity in economic output between Pakistan and leading economies, reflecting the advanced R&D capabilities and technological progress in these countries.
Regression analysis shows that the model has a high level of performance with an R2 value of 88.38% and an adjusted R2 value of 87.83%. According to the results of similar studies in the literature, the high R2 value shows that this model has a positive relationship between R&D expenditures and GDP. The model shows that the estimated variables are important in explaining changes in GDP. These results are consistent with studies showing the importance of a good business model in effective business management. For example, Mairesse et al. (2012) and Aghion et al. (2015) refer to the use of rigorous statistical analysis to assess the impact of R&D on economic growth, and the model fit in this analysis also shows similar results.
Conclusion and Recommendation
This study highlights the important role of research and development (R&D) expenditures in driving economic growth as evidenced by the positive and negative impacts of GDP in a number of country cases. The regression results show that R&D investments increase GDP growth and each additional unit of R&D expenditure contributes positively to GDP growth. More importantly, the fact that France, the United States, the United Kingdom, Germany, Japan, Italy and Canada have higher GDPs than Pakistan indicates economic differences among these countries. The high R2 (0.8838) and adjusted R2 (0.8783) of the panel least squares regression model account for about 88.79% of the variation in GDP, indicating its strength in explaining the variation in GDP. The main determinants (R&D expenditures and its correlation with lagged GDP) provide a positive outlook regarding the functioning of the economy. The main results of these changes demonstrate the importance of R&D as a driver of economic growth and support the effectiveness of the model in revealing the relationship between GDP and its determinants. The findings strengthen the link between R&D investment and business development, leading to positive business outcomes. For policy makers in Pakistan in particular, the implications encourage greater R&D spending as a strategy to increase GDP in the country. By investing more in research and innovation, Pakistan can keep pace with the economic growth of other advanced economies, as evidenced by the high GDP of the countries in this study.
Policy Recommendations
To boost economic growth through R&D, the following targeted policy recommendations are drawn from the research findings, aligned with policies of G7 nations, and offer actionable steps for Pakistan: Increase Public R&D Funding: provide an increased percentage of the country’s budget to R&D in high-impact sectors like renewable energy, healthcare, and advanced manufacturing. G7 countries like Germany and Japan successfully fund cutting-edge research through public investment, as highlighted by Mazzucato (2013), driving economic growth and fostering innovation. Strengthen Public-Private Partnerships: Facilitate joint R&D initiatives between government agencies and private firms by creating innovation hubs or technology parks. These initiatives, similar to models in the U.S. and UK, foster technology transfer and accelerate research commercialization, following recommendations from Cohen and Levinthal (1990). Enhance R&D Tax Incentives: Implement or expand tax credits for R&D activities to make innovation more financially viable for businesses. Accelerated depreciation for R&D equipment, as seen in G7 countries like Canada, can further encourage investment. Hall and Van Reenen (2000) support these measures for their positive effect on private-sector R&D investment. Support SMEs in Innovation: Offering grants and low-cost loans to SMEs participating in the study, following OECD (2014) guidelines. G7 policies prioritize financial support for SMEs, recognizing their role in driving innovation and economic growth. Invest in R&D Infrastructure: Build and maintain advanced research facilities and data-sharing platforms to support both academia and industry. Developing technology centers, as practiced in G7 nations, can significantly enhance research output, aligning with recommendations from Etzkowitz and Leydesdorff (2000). Promote Innovation Culture: Embed innovation and entrepreneurship into education curricula and launch awareness campaigns to encourage R&D investments. G7 countries like France emphasize education in fostering innovation, in line with Christensen's (1997) findings on nurturing innovative capabilities.