Causality analysis of R&D investment on basic research and gross domestic product

Abstract

The objective of this study is to determine a causal relationship between R&D investment and GDP (Gross Domestic Product) increase in South Korea based on time series data from 1983 to 2013. The cointegrating equations were found between the respective two variables, the short- and long-run causality between basic R&D investment and GDP increase as well as applied and development R&D investment and GDP increase using a vector error correction model. The study findings suggested that although basic research investment cannot cause economic growth in the short term, it does cause economic growth in the long term. However, economic growth was found not to cause basic research investment in the short and long terms. In addition, regarding the causality between applied and development research investment and economic growth, the applied and development research investment was found to cause the economic growth in the short term, but not in the long term. However, economic growth was found to cause the applied and development research investment in both the short and the long terms. This demonstrates that investment in basic research has a long-run causal effect on economic growth, but economic growth has neither a long- nor a short-run causal effect on basic research investment. This means that the virtuous cycle in which basic research investment grows the national economy, and economic growth induces basic research investment has not been formed. Therefore, it is concluded that the government needs to make financial and institutional efforts to ensure that economic growth leads to investment in basic science research.