The optimal level of R&D -the case of Sweden

Abstract: Expenditures on R&D in Sweden are the highest of all OECD countries in relation to its GDP. The level of education in Sweden is also among the highest in the OECD area. But despite of this, growth rates of GDP and productivity in Sweden can be considered as average levels compared to similar economies. Therefore, this paper questions whether R&D efforts in Sweden are optimal in a social perspective. R&D efforts are in this context seen as partly R&D expenditures as a share of GDP and partly level of human capital in the R&D sector. This question is analyzed by applying endogenous growth theory which is a general theory of knowledge production. It takes advantage of a dynamic optimization model developed by Paul Romer and a regression analysis with a distributed lag model of knowledge production. The conclusions are that the actual time path of R&D expenditures as a share of GDP is in fact optimal, but that the time path of human capital in the R&D sector is roughly 40 percent higher than optimal. But the conclusion is also that this area of research is very complex and consequently this type of analysis has many shortcomings with unknown variables and parameters which make the results inexact. Therefore, many subjective assumptions must be made and these will to a large extent affect the outcome.