Priorities for the Japanese Economy in 2017 (January 2017)

Does the Inclusion of R&D Spending in GDP Calculation Affect the Distribution of Resources?

TAMURA Suguru Senior Fellow, RIETI

Introduction

In 2016, a Japanese scientist was awarded the Nobel Prize in Physiology or Medicine, successfully continuing from the previous year which also saw a Japanese scientist awarded in the same category. It was also the year when a new chemical element, successfully synthesized by a Japanese team, was officially given the name Nihonium, taken after Nihon, which is the Japanese word for Japan (atomic number: 113, symbol: Nh). These represent the outcomes of basic research, indicating Japan's strength in this area. In terms of research outcomes, the nation's investment in research and development (R&D) is producing results.

Conducting R&D requires funding. It is important to grasp the amount of R&D funding for making international comparisons in related policies so as to discuss the level of R&D in terms of policy making. Japan did not include R&D expenditures in gross domestic product (GDP) calculation until November 2016, but started incorporating them at the end of 2016 (Note 1). Each country's GDP is calculated based on rules regarding the national economy calculation, as agreed upon at the United Nations. This change was made as Japan adopted the System of National Accounts 2008 (2008 SNA), an international standard that incorporate R&D expenditures into GDP, (including R&D in both public and private sectors). The new national accounts system has been already introduced in Australia, Canada, the United States, France, Britain, and Germany. The GDP figure based on the new system will be reflected in various policy discussions in full scale in 2017. Since the GDP is an economic index familiar to the general public, this reform has significant implications. This column will talk about the improvement and its impacts.

Outline of the change

The main changes under the 2008 SNA are as follows (Note 2):
(1) Expanding the scope of non-financial (real) assets
· Capitalization of R&D, etc.
(2) Recording the activities of the financial sector in greater precision
· Recording stock options for employees, etc.
(3) Treating general government and public corporations in greater precision
· Treating exceptional payments between the general government and public corporations in greater precision, etc.
(4) Establishing consistency with the international balance of payments statistics
· Enforcing the change of ownership principle on the importation and exportation of goods, etc.

The changes concerning R&D and their significance are explained as follows (Note 2):
(1) Reflecting the fact that R&D (knowledge capital) is accumulated as a fixed asset, like equipment, and contributes to production activities
(2) Facilitating international comparisons (catching up with the countries where 2008 SNA has been adopted)

Effect of the change

The nominal GDP for 2015, which incorporated R&D expenditures into the GDP, showed an increase of 19 trillion yen (i.e., $170 billion), equivalent to R&D spending (Note 1). Such change is a matter of statistics, with no direct impact on R&D outcomes immediately perceived. Yet, there may be additional effects.

First, the change makes it easier to understand the scale of R&D. Until now, R&D spending had been published as part of the Survey of Research and Development, conducted by the Ministry of Internal Affairs and Communications in the government of Japan. The survey is mainly used by R&D policymakers and researchers analyzing the economic potential of R&D investments and the general public is not familiar with this survey. The survey is rarely cited by economists or the mass media. Accordingly, information about R&D was rarely communicated. Incorporating R&D spending into GDP calculation facilitates better communication of such information, and could attract more attention. From the perspective of scientists, this makes it easier to gain understanding over their research activities. A positive effect is expected in terms of science communication.

At the same time, not only the research outcome but also its direct contribution to GDP growth could become a factor in determining the significance of R&D either implicitly or explicitly. What kind of impact would this have on the distribution of funding for public-sector R&D? There is a bias against highly original R&D because its outcomes are often unforeseeable as it would not deliver results in the short term. Even if results are obtained, the general public cannot easily recognize the significance of the research results. Generally speaking, this is the characteristic of basic research. In comparison purely based on research outcomes, basic research suffers from negative bias compared to applied research, as it is more difficult to have good evaluation in the short term. Modifying the GDP calculation approach could have the effect of correcting this bias.

Hypothesis and summary

The change is expected to increase emphasis on R&D spending's direct contribution to GDP growth. Therefore, this could make it easier to gain policy support for expanding the total amount of R&D investments. Securing budget allocation for basic research also might become easier. From an academic perspective, this reform could lead to a hypothesis that "the change has a significant effect on the distribution of resources between basic and applied research." This hypothesis is worth examining empirically in consideration of the impact of the change of the GDP calculation method on science and technology policies. In any case, I hope that this reform, introduced in the end of 2016, will lead to significant policymaking and Japan-originated R&D contributions in 2017.

December 28, 2016
Footnote(s)
  1. ^ 1) "Annual Report on National Accounts for 2015 (Benchmark Year Revision of 2011) Summary (Flow Accounts)"
    Economic and Social Research Institute, Cabinet Office (December 22, 2016)
  2. ^ 2) "Kokumin keizai keisan no heisei 23 nen kijun kaitei ni mukete" [Benchmark Year Revision of 2011 in Japanese National Accounts] (in Japanese)
    Economic and Social Research Institute, Cabinet Office (September 15, 2016)

March 31, 2017

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