Optimal Structure of Technology Adoption and Creation: Basic versus Development Research in Relation to the Distance from the Technological Frontier

Many economists maintain that in order to advance economic growth Asian countries should focus more on basic research than on technology adoption, and more on the supply of skilled workers than the supply of unskilled workers. In this context, this paper presents a theoretical model and empirical evidence to explain the observation that a country in which the level of technology approaches the technology frontier tends to rely more on technology creation than adoption, and invest more in basic research than in development. The model shows that technology creation involves both basic and development research processes, whereas technology adoption uses only the latter process. Therefore, R&D investment in our model involves three different processes: basic research in technology creation, development in technology creation, and development in technology adoption. The results suggest first that the rate of growth is positively correlated with the level of basic research activities in the technology creation sector, if a country's technology gap with the technology frontier is small enough. Second, an increase in the efficiency of the education system for highly skilled workers raises the level of basic research and the rate of growth. Third, verifying these theoretical results, empirical analyses using panel data from Korea, Japan and Taipei, China show that the narrower the distance to the technological frontier, the higher the growth effect of basic R&D, which indicates that the share of basic R&D matters for economic growth. Finally, the results also show that the quality of tertiary education has a significantly positive effect on the productivity of R&D.