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Research Policy 27 Ž1998.

677–687

The economic impact of Canadian university R & D


)
Fernand Martin
Faculte´ des arts et des sciences, Departement
´ ´
de sciences economiques, UniÕersite´ de Montreal,
´ C.P. 6128, succ. Centre-Õille, Montreal,
´
´ H3C 3J7, Canada
Quebec
Received 21 July 1997; revised 1 October 1997; accepted 24 June 1998

Abstract

Canadian university research expenditures and those of graduate students produce a gross static economic impact upon
the Canadian gross domestic product ŽGDP. which considerably overestimates the net static impact of university research.
Moreover, the net static impact, because it keeps constant the economic structure and the productivity of factors of
production, does not account for the principal beneficial impact of university research—the building of human capital and
the transfer of knowledge Žtechnology.. All of this leads to an increase in productivity and, thus, in the size of the GDP. This
effect is called the dynamic impact. This article, besides comparing succinctly the gross impact with the net static impact,
develops a practical method to measure the dynamic impact of university research. In a way, this method provides another
benchmark, besides the peer review, to judge the relevance of university R & D. q 1998 Elsevier Science B.V. All rights
reserved.

Keywords: R & D; University; Impact; Growth theory

1. Introduction Product GDP. 2 The purpose of these studies is to


justify government support for universities. Yet,
There is a large literature on the economic many of these studies or consulting reports Žcommis-
impact 1 of universities, either at the regional level sioned by universities themselves. are in part inade-
or at the national level, which establishes the contri- quate or incomplete. First, their computations usually
bution of university R & D to the Gross Domestic overstate the static economic impact of university
research activities, mainly because the static multi-
plier assumes a world where there are no constraints
in terms of primary resources, price changes, etc.
)
Tel.: q1-514-343-7216; Fax: q1-514-343-7221; E-mail: ŽPoole, 1993, p. 8.. Second, some of the studies lack
econo@ere.umontreal.ca or do not integrate correctly the dynamic impact,
1
Economic impact studies should be distinguished from cost–
which is the principal impact of university activities,
benefit analyses ŽCBA.. An economic impact study determines the
change in the composition of the GDP that can be traced to a
project, but where the project does not necessarily increase the
GDP in real terms. Furthermore, it does not deal with efficiency.
2
Only a CBA, using shadow prices, the consumer surplus and There is also a literature that evaluates university R&D by the
incorporating externalities, can determine the efficiency of a pro- judgment of peers, i.e., through the number of articles, citations,
ject and compute a social rate of return. etc. This article supplements these evaluation methods.

0048-7333r98r$19.00 q 1998 Elsevier Science B.V. All rights reserved.


PII: S 0 0 4 8 - 7 3 3 3 Ž 9 8 . 0 0 0 8 3 - 3
678 F. Martinr Research Policy 27 (1998) 677–687

especially R & D. The purpose of this article is to absence of foregone supplementary expenditures Žthe
clear up some misunderstandings about the signifi- supplementary disposable income graduate students
cance of the studies that limit themselves to the static would have earned over the one attainable by a first
approach, and more importantly to develop a practi- university degree, minus the subsistence level of
cal method to measure the dynamic 3 impact of expenditures just mentioned., the negative impact of
university activities, especially R & D. government subsidies Žgovernments must tax or can-
cel projects to finance university subsidies., and
finally ‘induced’ effects which are too uncertain to
2. Static and dynamic approaches for measuring be included.
the economic impact of university R & D In the case of Canadian university R & D, the net
Žthe ‘gross’ minus overstatements. 6 static annual
As alluded to above, there are two main ap- economic impact, $1.5 billion, is only one third of
proaches for measuring the economic impact of uni- the ‘gross’ economic impact.
versity activities: Ži. the static approach which is
based upon simulations through an input–output ŽI– 2.2. The concept of the dynamic economic impact of
O. model 4 or a crude regional multiplier, and Žii. uniÕersity R & D
the dynamic approach which corresponds to the share
of university research in the real increase in GDP Not only do universities have a static economic
imputable to the generation of knowledge Žtechnol- impact like other economic agents, but through their
ogy.. 5 graduates and the research of their star professors,
they Žwith other economic agents. also have a dy-
2.1. The static approach to measure the economic namic 7 impact upon the size and sources of a
impact of uniÕersity R & D country’s GDP.
This benefit to society has been historically and
The static impact is obtained by feeding an I–O empirically recognized. Historically, especially in the
model, representing the country’s economy, with United States, a large number of state universities
university R & D expenditures. In its ‘gross’ version, were created for utilitarian purposes. Later, some
all expenditures are considered new. Furthermore, public and private universities gave rise to well-
the results are sometimes ‘enriched’ by the induced known scientific-industrial complexes, e.g., Silicon
effect which accounts for the respending of earned Valley, the Research Triangle, and Route 128. To-
incomes. But, as is well known, the ‘gross’ eco- day, because of the acknowledged role they played
nomic impact, to which many studies limit them- in the definitive success of physical and natural
selves, is an overstatement because it includes a lot sciences Že.g., biotechnology and computing., and
of substitution effects. In the case of university the present movement toward the knowledge econ-
R & D impact studies, the substitution effects consist omy, these universities may be so much in demand
of subsistence expenditures of graduate students, the that they may have difficulties in maintaining their
liberal education tradition.

3
Although a better measure of the economic impact of univer-
6
sity research, the ‘dynamic’ impact must still, as will be seen Source: Martin Ž1997.. Yet, even in its ‘net’ version, the
below, be supplemented by a CBA for the determination of nature of the static multiplier stays the same; a positive impact
subsidies and policies regarding university research. does not necessarily mean an increase in a country’s welfare.
4 7
Note that most of the existing computable general equilibrium ‘Dynamic’ is defined here in opposition to ‘static’. In the
models are also static ŽBen Ali and Martens, 1993, p. 110.. static approach, university R&D expenditures do not change the
5
Nelson and Romer Ž1996. define scientific knowledge as the coefficients of the I–O table. But through the education and
know-how embodied either in software or in ‘wetware’ Žhuman knowledge that universities provide, they affect the productivity of
capital. which is not patentable, and technology as the software the factors of production. Eventually, this modifies the coeffi-
which is patentable. This applies to both internal and external cients of the I–O table. That is the ‘dynamic economic impact’, or
sources of knowledge, tacit knowledge, etc. the retroactive effect of university research upon the economy.
F. Martinr Research Policy 27 (1998) 677–687 679

Empirically, the ‘usefulness’ of university re- possible to link R & D expenditures to increases in
search is first measured by the fact that in some knowledge Žor technology., then to increases in pro-
countries, e.g., Canada, universities do 30% of all ductivity ŽBernstein, 1996, p. 391., and finally to
research with a portion of it financed by industry. changes in GDP. 11 This linear research model corre-
Second, studies by Jaffe´ Ž1989. Žp. 968., Berman sponds to the product life cycle approach or to the
Ž1990., Acs et al. Ž1992. and others show that: Ži. technological trajectory. 12 But since we do not need
university research has important spillovers in terms to distinguish basic research from applied research, 13
of innovations; Žii. it stimulates industrial R & D; and our computations are also compatible with today’s
Žiii. these effects are localized near universities. A interlocking research continuum where the phases
recent US compilation reinforces this opinion by are interwoven, blurred, etc. This is because so-called
showing that 53% of scientific papers cited on indus- ‘basic research’ is now directed work in solving
trial patents have a university source; the percentage questions arising late in a product-development cycle
goes up to 73% for all publicly funded research ŽVandendorpe, 1997.. In turn, this multiplies the
ŽNarin et al., 1997.. Though not strictly comparable, channels used by researchers of innovative firms to
this is much more than what previous research had access scientific and technological inputs provided
found. No wonder then that university R & D is now by university and other public research centers
viewed as an endogenous input to growth wStephan ŽFaulkner and Senker, 1995, pp. 90–91..
Ž1996. gives five reasons why this is sox. From the aggregate point of view, the pressure to
produce new knowledge Žtechnology. comes from
2.3. Measuring the dynamic impact of uniÕersity within the economic system. This is so because of
R&D imperfect competition, where firms must continu-
ously generate or have access to new knowledge to
The measurement of the dynamic impact of uni- reestablish their competitive position ŽStephan, 1996;
versity R & D is based upon aggregate data 8 pro- Romer, 1994, p. 13., and also because knowledge
duced largely by the neo-classical growth theory. 9 depreciates with the passage of time. 14
This credible source furnishes, among other things, Whatever the model of innovation used, the role
an estimate of the total factor productivity ŽTFP., 10 of R & D expenditures can be captured by assimilat-
an expression of the Solow residual which results ing ‘R & D capital to a factor of production and as a
from known and less known factors. spillover source in determining output and productiv-
Yet, somehow, this surplus can be traced to
changes in knowledge or in R & D capital ŽBernstein,
´
1996; Organisation de Cooperation ´
et de Developpe-
´
ment Economique, 1992, p. 187; Bayoumi et al., 11
These relationships are pretty well assured. See for instance
1996, pp. 12 and 20.. This is so because it is Fagerberg Ž1994. who mentions 30 studies that relate GDP per
capita to a set of variables including innovations. Yet, although it
is expected that an increase in productivity will increase GDP,
there are simulations which make room for at least an initial drop
in GDP following the rapid introduction of ‘general purpose
8
Especially the work done on the G-7 countries by the Organi- technologies’ such as computers ŽHowitt and Aghion, 1997.. For
´
sation de Cooperation ´
et de Developpement ´
Economique Ž1996.. an historical perspective, see David Ž1990..
12
This is different from data obtained by a sample of firms ŽMans- The linear model of innovation is still prevalent in some
field, 1991. or by interviews ŽFaulkner and Senker, 1995.. Yet, industries such as the pharmaceutical industry ŽFaulkner and
the experimental data provided by the authors just mentioned and Senker, 1995, p. 211; Vandendorpe, 1997..
13
a host of others are congruent with the aggregate approach of this As do ŽNelson and Romer, 1996, pp. 17 and 19. who feel that
paper. it is not only difficult to separate these two notions, but also that it
9
Our computations also appeal to a variant of the new growth is less necessary to do so today.
14
theory produced by Bayoumi et al. Ž1996.. Since our goal is to disaggregate the GDP already produced,
10
There is no denying that the quantification of the TFP, and its this article does not deal with the adjustment mechanisms or
allocation among various sources, is difficult. Consequently, our processes at work. Similarly, we do not have to examine in detail
results only correspond to what econometrics can offer at the the links between industry and universities as do Faulkner and
moment. Senker Ž1995..
680 F. Martinr Research Policy 27 (1998) 677–687

ity growth’ ŽBernstein, 1996, p. 393.. Total factor And the undepreciated direct local contribution to
productivity ŽTFP. growth corresponds, then, to: the stock of knowledge is:
y1
DTFP s Ž rg y 1 . Ž a l q b m q d k . q u t q m r q c s. 18
15
D s Ý Ž R & Dj . Ž 1 y d . Ž 4.
Ž 1. yn

This equation shows that with constant returns to


scale, a plausible hypothesis in the case of Canada 2.4. The nature of the link between R & D and GDP
ŽBernstein, 1996, p. 403.,
The link between R & D and GDP has two charac-
DTFP s u t q m r q c s. Ž 2. teristics.
DTFP is consequently a function of various sources Ž1. R & D is a generic term that covers the contri-
of knowledge or technology. 16 bution of the chain of R & D activities leading to new
The sources of the stock of knowledge, R, avail- products or processes, whether the innovation pro-
able locally are: cess is linear Žbasic research is followed by applied
17 research. or an interlocking continuum. Here,
R s f Ž D,T , Is . Ž 3. spillovers from one firm to another, or from one
industrial sector to another 19 are automatically in-
corporated since we are dealing with all R & D ex-
15
penditures.
Source: adapted from Bernstein Ž1996. Žp. 395. where DTFP Ž2. The contribution of R & D expenditures Žlater
s change in total factor productivity. r san index of returns to
scale, e.g., r s1 means constant returns to scale. a 1 ß, d s
measured by their rate of return., is governed by the
production elasticities of rates of growth of factors of production: facilitating structure 20 so that what is attributed to
l,m,k s factors of production: labour, intermediate inputs and
physical capital. u s the time trend that represents the rate of
17
technological change that is not immediately attributable to R&D Rsstock of knowledge available locally. Dsdomestic stock
capital and spillovers ŽBernstein, 1996, p. 409, footnote 4.. r, ss of knowledge accumulated through previous R&D expenditures
rates of growth of scientific capital and its spillovers, m and c Žcontributors to this stock include private, government and univer-
their production elasticities. sity R&D.. T sstock of knowledge obtained from abroad by
16
Although u is a separate variable in Eq. Ž1., in the long run international trade or multinational corporations; Is sspillovers of
its role though circumspect ŽBernstein, 1996. is not divorced from international scientific capital Žobtained by means other than
knowledge. Indeed, trend productivity can be defined as ‘the trade.. The above are the three components of the IMF’S MULTI-
capacity to absorb new technology and production practices devel- MOD model that Bayoumi et al. Ž1996. use to quantify the impact
oped and used elsewhere, . . . Žand. . . . changes in the quality of of R&D expenditures.
18 y1
inputs, . . . Žsuch. . . . as better educated workers’ ŽEconomic Ýyn R&Dj sdomestic R&D expenditure of country j done
Council of Canada, 1992, p. 22.. But education, experience or from year y n to y1. ds rate of obsolescence of knowledge.
19
trend productivity are a function of R&D activity Žpast and So that even if only a few Canadian manufacturing firms do
present. since you need to be a competent and involved researcher much of the research, they have an impact Žmeasured by their
to ‘understand, interpret and appraise knowledge that has been put spillovers. across the whole economy. For instance, the non-
on the shelf’ ŽRosenberg cited by Pavitt Ž1991., p. 112., whether manufacturing sector is a heavy user of innovations produced by
you want to innovate or simply imitate ŽFagerberg, 1994, p. the manufacturing sector ŽMohnen, 1994, p. 19.. Furthermore, Eq.
1161.. So that in a fundamental sense, all economic growth, even Ž3. shows that the source of knowledge is not exclusively local.
20
growth that is directly caused by capital accumulation, can ulti- The facilitating structure or ‘milieu’ includes variables at the
mately be attributed to technological change ŽNelson and Romer, firm, industry and economy levels ŽLipsey and Carlaw, 1996, 256
1996, p. 14.. That means that ‘without knowledge, there would be ff pp.., such as the financial and institutional organization of the
none of the other things’ ŽLipsey and Carlaw, 1996, p. 256.. This production unit, the degree of concentration of the industry, public
is why DTFP can be attributed to the production of knowledge. sector institutions such as private property, infrastructures, demo-
Admittedly, this conclusion is due to the choice of the variable graphics, regulations concerning labour markets, international trade
knowledge which was chosen to play the role of the residual Ži.e., regulations, the quality of the labour force, etc. Žsee also Organisa-
the variable that accounts for the increase in productivity not ´
tion de Cooperation ´
et de Developpement ´
Economique, 1996, p.
directly attributable to the other factors of production in a given 34.. All this corresponds to unobserved factors. Many of these
function.. But, as said above, this choice is logical given today’s factors explain the Solow paradox ŽOrganisation de Cooperation ´
paradigm where growth is said to be increasingly driven by ´
et de Developpement ´
Economique, 1996.. ŽGrossman and Help-
knowledge generation. man, 1994, p. 31. also acknowledge the role of a ‘facilitator’.
F. Martinr Research Policy 27 (1998) 677–687 681

R & D supposes and r or includes the indirect contri- oumi et al. Ž1996. ŽTable 3. propose Žfor all indus-
bution of the ‘milieu’. Consequently, the effective- trial countries. 21% of TFP originating in foreign
ness of R & D expenditures is maintained only so countries Žwith a negligible contribution from for-
long as the facilitating structure keeps pace with the eign trade.. Žiii. Mohnen Ž1994. Žp. 25. mentions
level of R & D. 25% to 65% as the contribution of foreign countries
to TFP.
Missing is the contribution of Canadian R & D to
3. The quantification of the contribution of do- foreign countries or Canadian R & D done in foreign
mestic R & D expenditures countries. This is an asset since intra-firm transac-
tions over national borders begets reciprocity. Fur-
The quantification of the contribution Žin an ac- thermore, let us note that the above percentages,
´
counting sense, see Organisation de Cooperation et arrived at through direct R & D expenditures, do not
´
de Developpement ´
Economique, 1996, p. 29. of give full credit to the fundamental role of domestic
domestic R & D expenditures to the Canadian GDP is R & D since, as said before, foreign R & D becomes
based upon the model presented in Section 2 above usable Žalbeit by incurring transaction costs. only as
and upon OECD computations. The procedure be- long as there exists competent local researchers
gins by allocating a portion of the average rate of themselves engaged in R & D activities and which
growth Žperiod 1971 to 1993. of the Canadian GDP are at proximity ŽGrossman and Helpman, 1994, p.
to the TFP. Then, according to Eq. Ž3., it allocates 39.. Otherwise, the spillovers do not materialize. In
the TFP to its contributors: domestic R & D, foreign the knowledge sphere, they remain a mass of innocu-
R & D and foreign trade. ous bits of information, and the potential of new
machines is not fully perceived or exploited.
3.1. The importance of TFP in Canadian GDP For all of these reasons, we recognize the critical
role of domestic R & D by setting the foreign contri-
With the average growth rate of GDP at 3.25% bution in R & D to the Canadian TFP at only 29%
Žin real terms. and TFP being 20% of DGDP Žthe Žthe average of the values of two of the sources
rest being allocated to L and K., the contribution of mentioned above plus the minimum of Mohnen. plus
TFP or knowledge to the Canadian GDP of 1993 is 2% for foreign trade ŽBayoumi et al., 1996., for a
$73 billion Žin current Can$.. 21 total of 31%. The portion of the difference in Cana-
dian GDP between 1971 and 1993 that should be
3.2. Allocating to domestic R & D a portion of the allocated to Canadian R & D is consequently $50
contribution of TFP to the growth of GDP billion. 22
In other words, $50 billion of the Canadian GDP
The further disaggregation of the GDP growth for 1993 Ž$712.9 billion. at market prices is derived
due to various sources of knowledge into its compo- from knowledge produced in Canada. For many
nents presents even more problems, but a consider- people, attributing 7% of Canadian GDP for 1993 to
able amount of econometric work has already been local knowledge is exaggerated. They hold ‘that the
done: Ži. OECD suggests that 42% of the Canadian resources spent on commercial research and develop-
TFP originates outside Canada for the 1980s ment are too small for business-generated technolog-
´
ŽOrganisation de Cooperation ´
et de Developpement ical improvements to be the driving force behind
´
Economique, 1996, graph 2.6.. Presumably, that growth’ ŽGrossman and Helpman, 1994, p. 31.. In
covers foreign R & D spillovers and trade. Žii. Bay- the case of Canada, the objection is how can 1.5% of
GDP spent on R & D accounts for 7% of GDP in-
crease GDP?

21
More precisely: $73.085304 billion. See Appendix A for
computations. This is a minimum; with the Divisia method the
22
contribution could reach $91.36 billion. That is, 73.085304=0.69s 50.428859 in current Can$.
682 F. Martinr Research Policy 27 (1998) 677–687

The answer lies in the recourse to the social rate 4. Quantifying the contribution of university R & D
of return of R & D which includes the return to
innovators and the economic impact on users, those Having established that $50 billion of the 1993
affected through spillovers, and a host of unknown GDP can be imputed to Canadian generated knowl-
indirectly affected beneficiaries. edge, the task is now to allocate a portion of this
There is an abundant literature 23 measuring the amount to university R & D.
social rate of return by country, by group of indus- Because there are others contenders Žprivate and
tries and by group of firms, etc. Figures vary consid- government laboratories., the usefulness of univer-
erably, but a rate of return of 30% seems a reason- sity research must first be established, at least in
able approximation. It also seems to fit the Canadian general terms since: Ži. few academic results, directly
case since a simulation involving a yearly R & D and immediately, contribute to innovation, and Žii.
investment of 1.5% of GDP starting in 1971, a social university R & D produces by-and-large non-ap-
rate of return of 30% and a useful life of 7 years for propriable knowledge, e.g., new ideas ŽHowitt, 1996,
innovations, makes the GDP grow Žin real terms. up pp. 15–16.. No wonder then that this contribution is
to 1993, at a rate of 3.25%, which is exactly what labelled ‘minor’ ŽFaulkner and Senker, 1995, p. 206..
has happened. Note that the social rate that connects At the same time university R & D is highly valued
the initial R & D expenditures to the eventual GDP and even considered important by: Ži. lobbyists of
increase, takes for granted the contribution of re- the business sector who urge the government to
sources provided by the ‘milieu’ Žstimulated by R & D generously finance university research, especially the
expenditures., i.e., users, those affected by spillovers risky and exploratory kind ŽVandendorpe, 1997.; Žii.
and the rest of the economy. R & D expenditures are the business sector which finances 31.3% of univer-
then seen as the catalyst to growth. Provided that its sity research Žin Quebec, Canada in 1993–1994.;
social rate of return holds, 24 the R & DrGDP ratio and Žiii. the innovation studies that ‘confirm that
can be used as a benchmark against which individual academic and government laboratories make a signif-
firms or countries compare their own level of R & D icant knowledge contribution to innovation’
expenditures and eventually make decisions. 25 It is ŽFaulkner and Senker, 1995, p. 41..
then part and parcel of the decision-making process. Indeed, universities make knowledge Žbasic and
Yet, in no way is it implied that by simply changing applied. available to the Canadian economy, thus
the level of R & D expenditures will sales or the GDP increasing its productivity by: Ži. ameliorating the
change by the benchmark multiplier, since the im- supply of human capital Žgraduate students.; 27 Žii.
pact depends upon an a priori unknown social rate of their own research Žfundamental or applied.; and Žiii.
return. 26 the consulting activities of their teachers and star
researchers ŽMansfield and Lee, 1996, p. 1056.. By
23
doing so they attract, retain and generate high-tech
For example, Mansfield et al. Ž1977., Mohnen Ž1994., Bern- industries.
stein Ž1996., etc.
24
Being an average measure of impact, the ratio covers both
Second, the quantification per se uses the two
successful and unsuccessful R&D projects. Thus, the multiplier channels that connect university R & D with the GDP:
derived from the ratio cannot be used for a single project. Ž1. The enhanced productivity of human capital Žthe
25
In many industries, there is an R&Drsales ratio common to
almost all the firms of the industry; e.g., in computer communica-
tion equipment it is 12.1%, in pharmaceutical 11.6%, in aircraft
3.4%. The ratios of R&D to value added are even higher, respec-
27
tively 21%, 16.9%, 18.5%. Source: Schonfield et al. Ž1996.. It is As is often said, the ‘primary role . . . Žaccording to Martin
the value added that is compatible with GDP. and Irvine, 1981. . . . of universities is in the education of qualified
26
This is illustrated by the simulation of Bayoumi et al. Ž1996. scientists’ ŽFaulkner and Senker, 1995, p. 20.. This is echoed by
ŽTable 1., where, for a sustained increase of 1r2 of 1% in the Nelson and Romer Ž1996. Žpp. 19–20. and by Vandendorpe
R&DrGDP ratio for the US, there follows an increase Žcompared Ž1997.. Yet, this does not confine universities to the classroom
to the baseline. of 4.2% of GDP after 15 years and of 7.1% after since teaching and research are not separate activities. Indeed,
35 years. They implicitly assume that the previous social rate of highly trained graduates cannot be developed without the faculty
return prevails during the simulation. itself being highly involved in research.
F. Martinr Research Policy 27 (1998) 677–687 683

differential income of university graduates.. 28 This Canada having been set at $50.4 billion and having
differential output 29 is part of the $50 billion of already allocated $7.7 billion of this output to uni-
GDP imputed to Canadian knowledge. Ž2. The en- versity graduates, a reasonable but imperfect basis to
hanced productivity of the rest of the economy: firms allocate the remainder to university research is to use
that finance a good portion of university research, its relative importance in all R & D in Canada, i.e.,
spin-offs and firms that benefit freely from spillovers. 30%. 32 The share of university R & D is then:
4.1. Measurement of the contribution of uniÕersity $42.693711 = 0.30 s $12.808113
R & D through the enhanced productiÕity of human
capital 4.3. The total contribution of uniÕersity R & D to the
change in Canadian GDP (1993)
The enhanced productivity of university graduates
Žhigher degrees. is put at $7.7 billion ŽCan$.. 30
However, this amount cannot be entirely credited to Its contribution to the human 2.707302
universities since this increase in productivity Ždue to capital Žbillion Can$.
the generation and transfer of knowledge. is the Its contribution to other economic 12.808113
result of two contributing factors: agents Žbillion Can $.
Ža. students who contribute tuition fees, subsis- Total Žbillion Can$. 15.515415
tence expenditures and foregone income Žfor those
that study full time.;
Žb. university expenditures.
5. Conclusion
By weighting the expenditures of each contributing
factor, the share of universities amounts to 35%. 31
It is commonplace to say that university research
That means that the contribution of university
has the potential to produce breakthrough advances
R & D through the differential productivity of their
that can fundamentally alter economic growth, even
graduates to the Canadian GDP is:
if not all of the research leads to world-changing
$7.7 = 0.35 s $2.7 billion Ž Can$ . . results.
This article has shown that the stream of new
4.2. Measurement of the contribution of uniÕersity
ideas and technologies stemming from universities
R & D through the enhanced productiÕity of other
translates, when its economic impact is measured
factors of production
through the dynamic approach, into an appreciable
From Section 3.2, the portion of the Canadian growth in GDP and employment.
GDP derived from access to knowledge produced in

28
Here we are only considering the added productivity stem-
32
ming from university research, i.e., the difference between the Strictly, the relative importance of university expenditures is
output Žincome. of graduates with higher degrees and the output 26.36% since direct university R&D is $2.0513 billion, while total
of those with only a first degree. As said before, we suppose that Canadian R&D is $7.7828 billion PPA US$ ŽOrganisation de
higher degrees cannot be produced without university research ´
Cooperation ´
et de Developpement ´
Economique, 1994, pp. 52 and
and adequate facilities. Note that measuring the contribution of 54.. We have marginally increased this percentage to 30% for the
university R&D through the differential income of its graduates same reasons that we have also marginally augmented the relative
somewhat underestimates its contribution for two reasons: Ži. the importance of Canadian general R&D expenditures in GDP ŽSec-
substitution of new technologies for old ones requires more tion 3.2.. One reason is that the less the knowledge is appropri-
education ŽNelson, cited by Fagerberg, 1994, p. 1153., Žii. gradu- able, the greater the spillovers Ži.e., the less the expenditures
ates Žhigher degrees. produce spillovers that ameliorate the pro- approach accounts for the real impact.. This is especially the case
ductivity of other employees ŽGlaeser, 1996, p. 73.. of fundamental research where big payoffs are eventually traced
29
This contribution is net of the necessary remuneration of the to such research ŽMurphy, 1996, p. 4.. This is complicated by the
other cooperating inputs. fact that only a very small portion of the basic knowledge
30
See Appendix B. produced by universities is either patented or patentable
31
See Appendix C. ŽTrajenterberg et al., 1992, p. 18..
684 F. Martinr Research Policy 27 (1998) 677–687

Furthermore, since university research accelerates Source of price index: Statistics Canada ŽCat.
at least the development of new products, countries 11210XPB, p. 42..
that support it secure a favourable position in a The portion allocated to TFP is then:
knowledge-intensive, globally competitive market-
place. 365.42652 = 0.20 s 73.085304 Ž billion $ 1993 .
where 0.20 is inferred from graph no. 2.1 as
´
TFPrDGDP Žsource: Organisation de Cooperation et
Acknowledgements ´
de Developpement ´
Economique, 1996, p. 29. or
from a statement on p. 28. Žibid... That means that in
This article is based upon a study made for the the GDP of 1993, $73.1 billion is attributable to the
Association of Universities and Colleges of Canada cumulative effect of TFP since 1971. ŽWe do not
ŽA.U.C.C... The author has benefited from docu- credit TFP for any influence before 1971; we are
ments and advice provided by Herb O’Heron of consequently underestimating the influence of tech-
A.U.C.C. and from Ronald Rioux of Statistics nological progress..
Canada. My colleagues Robert Lacroix, Marcel Da- This is also a minimum ŽOrganisation de
genais and François Vaillancourt have also helped ´
Cooperation ´
et de Developpement ´
Economique,
me. Peter Hanel of the Universite´ de Sherbrooke and 1996, p. 28., since with the Divisia method the
Pierre Mohnen of UQAM have criticized the paper. contribution would be 25% Žibid., p. 273.. That
Of course, none of the above mentioned people are means that the contribution of TFP to GDP could be
responsible for any errors or omissions. as high as 91.36 Žbillion $ 1993..

Appendix A. Computation of the portion of the Appendix B. Measurement of the additional pro-
Canadian GDP 1993 accounted for by total factor ductivity of university graduates
productivity
The additional productivity of graduates Žhigher
The computations are based upon the average rate
degrees. is measured by their differential income. In
of growth of the GDP from 1971 to 1990 compiled
Canada Žsource: Statistics Canada, 1994, Cat. 13-
by OECD. It is assumed that this rate of growth
217., the average income of a person with a univer-
applies also up to 1993, thus for 22 years:
sity degree is $58,691ryear for men, and
1.0325 22 = 286.998 Ž billion Can$ 1986, for the $41,730ryear for women, for an average Žcomputed
by the author. of $51,787ryear. On the other hand,
year 1971 . s 580.04253 Ž billion $ 1986 for the
the average income of those people in the category
year 1993 . . just below a university degree is $36,711ryear. The
increase in income due to a university degree is then
´
Sources: Organisation de Cooperation ´
et de Develop-
$15,076ryear.
´
pement Economique Ž1996. Žp. 29. and Statistics
The increase Žconsidering the working life. is
Canada ŽCat. 11210XPB, p. 7..
greater for higher and professional degrees than for
The increase in GDP from 1971 to 1993 in 1986 $
BA degrees, and for men compared to women. For
is:
men Žused as an index., Hecker Ž1995. Žp. 4, Table
580.04253 y 286.998 s 293.04453 Ž billion $ 1986 . . 1. puts the increase in income of a BA at $4000 less
Transformed in $ 1993: than the average increase in income for all degrees.
For MA degrees, the increase in income is $3000
293.04453 = 1.247 Ž the GDP price index of 1993 more than the average for all degrees. It is of course
in terms of $ 1986 . considerably more for PhD and professional degrees,
but there are fewer people in this category. Their
s 365.42652 Ž billion Can$ 1993 . . relative importance is thus small and as such ne-
F. Martinr Research Policy 27 (1998) 677–687 685

glected. Something similar affects the income of from better libraries, laboratories, equipment, etc.
women with degrees. The ranking of universities testifies to that point.
In the absence of more information we put the Consequently, the way to account for the contri-
differential of income of MAs, PhDs and profes- bution of R & D activities to BA degrees is to credit
sional degrees at $4924 Žto eventually have round universities with 25% of the increase in income
numbers. over the average differential in income due Žproductivity. of a BA degree Ž$12,500 to R & D,
to a university degree. Thus, the average income of i.e., $3125..
MAs, PhDs and professional degrees is 36,771 q For Canada, as a whole, the yearly increase in
Ž15,076 q 4924. s $56,711. productivity originating in university graduates is
The average income of BA degree holders is then:
computed as a residue in the following computations.
833,975 Žgraduates with 6,254,812,500
Step one: The differential income of all university
higher degrees. = $7500s
graduates ŽBA q MA q PhD q professionals. is:
1,585,775 Žgraduates with 4,955,546,875
$15,076 33 = 2,419,750 34 s $ 36,479,751,000.
BA degrees only. = $3125s
Step two: Already the MA, PhD and professional
Total 11,210,359,375
degrees account for $16,679,500,000. 35 That means
that the remaining 1,585,775 BA degrees account But as shown in Section 3.2, approximately 69%
for Ž 36,479,751,000 – 16,679,500,000 . , i.e., of this amount can be imputed to local R & D, since
19,800,251,000. Then, 19,800,251,000 % 1,585,775 31% of knowledge is from foreign sources. Conse-
yields $12,500 Žin round numbers. per BA degree, or quently, the change in GDP that can be attributed to
an income of 36,711 q 12,500 s $49,211. 36 a change of knowledge through graduate students
A higher degree provides, then, $7500 of yearly originating in universities is:
income more than a BA degree. That represents the $11,210,359,375 = 0.69 s 7.73514796875
net contribution of graduate studies and at the same
billion Ž Can $ . .
time the R & D knowledge transmitted to these de-
gree holders.
For the BA degree, even if a R & D basis is not
absolutely necessary to transmit the required knowl- Appendix C. Share of universities in the differen-
edge, it remains that without being nourished by tial productivity of university graduates (higher
research BA teaching would stagnate. That means degrees)
that this teaching is still to a small extent Žfor
The share of universities in the provision of a
instance, one fourth. tributary to research. Indeed,
higher university degree comes from the costs they
many teachers teach at both the undergraduate and
incur compared to the costs supported by the stu-
graduate levels. Furthermore, undergraduates profit
dents themselves. The total cost of a degree is the
sum of both sources of costs.
Ža. The costs incurred by the university for a
33 typical graduate student 37 are as follows.
The average increase in income due a university degree
Žcomputed before.. The average annual cost incurred by the univer-
34
According to Statistics Canada, Cat. 93329, 1991, there are in sity to train a student of a higher degree Ža weighted
Canada 833,975 MA and higher degrees, and 1,585,775 BA average of MA and PhD degrees. was, for the year
degrees, for a total of 2,419,750 degree holders. 1993–1994, $16,928.
35
833,975=Ž15,076q4924. s$16,679,500,000. Since the average length of studies for a higher
36
The Canadian data seem to give Žfor BA graduates. relatively
higher numbers than the US data as provided by Hecker Ž1995.. It
degree is 5.0118 semesters, and the typical student
is the contrary for MA and PhD degrees. Besides the different uses the university services during 2.25 semesters
labor markets, one explanation for the discrepancy is the fact that
Hecker dealt with the year 1991, and Stat. Can. with 1993.
37
Because of lack of data, and because our interest is mainly The figures come from the Universite´ de Montreal,
´ presum-
methodological, our aim is only to produce satisfactory figures. ably an average university Žsee Martin, 1996..
686 F. Martinr Research Policy 27 (1998) 677–687

per year, the cost Žnon-actualized. to the university Economic Council of Canada ŽECC., 1992. Pulling Together.
is: Minister of Supply and Services, Ottawa.
Fagerberg, J., 1994. Technology and international differences in
$16,928 = Ž 5.0118r2.25 . s $37,707 per student growth rates. Journal of Economic Literature 32 Ž3., 1167–
1175.
Žb. The opportunity cost incurred by a student for Faulkner, W., Senker, J., 1995. Knowledge Frontiers. Clarendon
a higher degree: Ži. tuition fees: $1400rsemester= Press, London.
5.0118 semesters Žper student. s $7016. Žii. The op- Glaeser, E.L., 1996. Why economists still like cities. City Journal
portunity cost in terms of lost income is based upon 6 Ž2., 70–77, Spring.
Grossman, G.M., Helpman, E., 1994. Endogenous innovation in
three hypotheses. Ž1. As a BA graduate, the student
the theory of growth. Journal of Economic Perspectives 8 Ž1.,
could have earned $33,000ryear or $2750rmonth, 23–44.
had he not pursued his studies at the MA or PhD Hecker, D.E., 1995. Earnings of College Graduates. Monthly
level. Ž2. His affiliation with the university would Labor Review 188 Ž12., Bureau of Labor Statistics, Depart-
have lasted: ment of Labor, Washington, DC.
Howitt, P., 1996. On some problems in measuring knowledge-
5.0118 semesters based growth. In: Howitt, P. ŽEd.., The Implications of
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versity of Calgary Press, Calgary, pp. 9–29.
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plus Žiii. supplementary incidental expenditures Žs policy. In: Howitt, P. ŽEd.., The Implications of Knowledge-
Based Growth for Micro-Economic Policies. University of
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37707 Research Policy 20, 1–12.
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