Does the distribution of R&D incentive among production factors matter? A dynamic general equilibrium model for Türkiye

Abstract

PurposeThis study aims to explain the effect of research and development (R&D) incentives on economic growth, focusing on the case of Türkiye. A one-sector endogenous growth model has been constructed. The model includes three actors: firm, consumer and government. The consumer derives utility from consumption, supplies human capital and engages in saving. The representative firm invests in R&D to maximize the current value of profit flows by choosing how much input it will use and how much R&D it will undertake. The public sector provides incentives for labor and capital used in R&D production. R&D has been defined as a function that endogenously increases total factor productivity (TFP).Design/methodology/approachIn line with the stated purpose, this study presents a dynamic general equilibrium model. Then, this study calibrates the model parameters with Türkiye's data.FindingsThe results imply that incentives for R&D personnel instead of physical capital have a stronger impact on economic growth.Practical implicationsThe findings of this study point to an important conclusion on how to distribute R&D incentives across the two main factors in R&D production, labor and capital. Incentives given to R&D personnel are more effective in Türkiye.Originality/valueThis study shows that the R&D incentives provided by the public sector can be important in emerging countries where many firms have just started their R&D activities. In this study, the authors worked on Türkiye as an emerging country. This study discusses policies on how the R&D incentives will be more effective on economic growth in Türkiye. This study considers that these policies may apply to all emerging countries, due to similar R&D activities in countries that cannot export technology and mostly import technology.