Innovations in the Digital Economy: Promotion of R&D and Growth in Open Economies

Starting in the 1980s, a new wave of economic globalization has brought about a relative increase of foreign direct investment and hence a rising role of multinational companies (MNCs). MNCs are crucial for the diffusion of new knowledge, and those firms are also key actors in research and development. With China and a new Russia – plus the smaller former socialist CMEA countries of Eastern Europe – opening up to the world economy, new players have entered global markets and competition has intensified. The end of the Cold War has intensified the global innovation race for civilian products as the share of military R&D expenditures in the US, France and the UK has fallen to close or less than 50%.

There is a long-term upward trend in the ratio of expenditures on research and development (R&D) to national income. While the ratio of R&D to GDP was close to 1% in OECD countries in the 1960s, it reached about 2% in the 1980s and is moving towards 3% at the beginning of the 21st century. Technological competition has increased since expenditures on research and development have grown relative to GDP. While process innovations have reduced production costs, product innovations stand for novel goods for which consumers (or investors) show a higher willingness to pay than for standard products. Product innovations also tend to raise profitability of firms and hence stimulate investment. While innovations in industry are often reflected in patents, innovations in services are more difficult to protect through intellectual property rights. A special case is software which enjoys copyright protection and more recently patent protection in the US. Technological competition also increased in the 1990s and the early 21st Century, because global diffusion of new knowledge accelerated due to the expansion of the internet.