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

There is a large literature on the economic
impact 1 of universities, either at the regional level
or at the national level, which establishes the contri-
bution of university R & D to the Gross Domestic
)
Tel.: q1-514-343-7216; Fax: q1-514-343-7221; E-mail:
econo@ere.umontreal.ca
1
Economic impact studies should be distinguished from cost–
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.
Only a CBA, using shadow prices, the consumer surplus and
incorporating externalities, can determine the efficiency of a pro-
ject and compute a social rate of return.
justify government support for universities. Yet,
many of these studies or consulting reports Žcommis-
sioned by universities themselves. are in part inade-
quate or incomplete. First, their computations usually
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.
ŽPoole, 1993, p. 8.. Second, some of the studies lack
or do not integrate correctly the dynamic impact,
which is the principal impact of university activities,
2
There is also a literature that evaluates university R&D by the
judgment of peers, i.e., through the number of articles, citations,
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
clear up some misunderstandings about the signifi-
cance of the studies that limit themselves to the static
approach, and more importantly to develop a practi-
cal method to measure the dynamic 3 impact of
university activities, especially R & D.
2. Static and dynamic approaches for measuring
the economic impact of university R & D
As alluded to above, there are two main ap-
proaches for measuring the economic impact of uni-
versity activities: Ži. the static approach which is
based upon simulations through an input–output ŽI–
O. model 4 or a crude regional multiplier, and Žii.
the dynamic approach which corresponds to the share
of university research in the real increase in GDP
imputable to the generation of knowledge Žtechnol-
ogy.. 5
2.1. The static approach to measure the economic
impact of uniÕersity R & D
The static impact is obtained by feeding an I–O
model, representing the country’s economy, with
university R & D expenditures. In its ‘gross’ version,
all expenditures are considered new. Furthermore,
the results are sometimes ‘enriched’ by the induced
effect which accounts for the respending of earned
incomes. But, as is well known, the ‘gross’ eco-
nomic impact, to which many studies limit them-
selves, is an overstatement because it includes a lot
of substitution effects. In the case of university
R & D impact studies, the substitution effects consist
of subsistence expenditures of graduate students, the
3
Although a better measure of the economic impact of univer-
sity research, the ‘dynamic’ impact must still, as will be seen
below, be supplemented by a CBA for the determination of
subsidies and policies regarding university research.
4 7
Note that most of the existing computable general equilibrium
models are also static ŽBen Ali and Martens, 1993, p. 110..
5
Nelson and Romer Ž1996. define scientific knowledge as the
know-how embodied either in software or in ‘wetware’ Žhuman
capital. which is not patentable, and technology as the software
which is patentable. This applies to both internal and external
sources of knowledge, tacit knowledge, etc.
absence of foregone supplementary expenditures Žthe
supplementary disposable income graduate students
would have earned over the one attainable by a first
university degree, minus the subsistence level of
expenditures just mentioned., the negative impact of
government subsidies Žgovernments must tax or can-
cel projects to finance university subsidies., and
finally ‘induced’ effects which are too uncertain to
be included.
In the case of Canadian university R & D, the net
Žthe ‘gross’ minus overstatements. 6 static annual
economic impact, $1.5 billion, is only one third of
the ‘gross’ economic impact.
2.2. The concept of the dynamic economic impact of
uniÕersity R & D
Not only do universities have a static economic
impact like other economic agents, but through their
graduates and the research of their star professors,
they Žwith other economic agents. also have a dy-
namic 7 impact upon the size and sources of a
country’s GDP.
This benefit to society has been historically and
empirically recognized. Historically, especially in the
United States, a large number of state universities
were created for utilitarian purposes. Later, some
public and private universities gave rise to well-
known scientific-industrial complexes, e.g., Silicon
Valley, the Research Triangle, and Route 128. To-
day, because of the acknowledged role they played
in the definitive success of physical and natural
sciences Že.g., biotechnology and computing., and
the present movement toward the knowledge econ-
omy, these universities may be so much in demand
that they may have difficulties in maintaining their
liberal education tradition.
6
Source: Martin Ž1997.. Yet, even in its ‘net’ version, the
nature of the static multiplier stays the same; a positive impact
does not necessarily mean an increase in a country’s welfare.
‘Dynamic’ is defined here in opposition to ‘static’. In the
static approach, university R&D expenditures do not change the
coefficients of the I–O table. But through the education and
knowledge that universities provide, they affect the productivity of
the factors of production. Eventually, this modifies the coeffi-
cients of the I–O table. That is the ‘dynamic economic impact’, or
the retroactive effect of university research upon the economy.
 F. Martinr Research Policy 27 (1998) 677–687
Empirically, the ‘usefulness’ of university re-
search is first measured by the fact that in some
countries, e.g., Canada, universities do 30% of all
research with a portion of it financed by industry.
Second, studies by Jaffe´ Ž1989. Žp. 968., Berman
Ž1990., Acs et al. Ž1992. and others show that: Ži.
university research has important spillovers in terms
of innovations; Žii. it stimulates industrial R & D; and
Žiii. these effects are localized near universities. A
recent US compilation reinforces this opinion by
showing that 53% of scientific papers cited on indus-
trial patents have a university source; the percentage
goes up to 73% for all publicly funded research
ŽNarin et al., 1997.. Though not strictly comparable,
this is much more than what previous research had
found. No wonder then that university R & D is now
viewed as an endogenous input to growth wStephan
Ž1996. gives five reasons why this is sox.
2.3. Measuring the dynamic impact of uniÕersity
R&D
The measurement of the dynamic impact of uni-
versity R & D is based upon aggregate data 8 pro-
duced largely by the neo-classical growth theory. 9
This credible source furnishes, among other things,
an estimate of the total factor productivity ŽTFP., 10
an expression of the Solow residual which results
from known and less known factors.
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.,
1996, pp. 12 and 20.. This is so because it is
8
Especially the work done on the G-7 countries by the Organi-
´
sation de Cooperation ´
et de Developpement ´
Economique Ž1996..
This is different from data obtained by a sample of firms ŽMans-
field, 1991. or by interviews ŽFaulkner and Senker, 1995.. Yet,
the experimental data provided by the authors just mentioned and
a host of others are congruent with the aggregate approach of this
paper.
9
Our computations also appeal to a variant of the new growth
theory produced by Bayoumi et al. Ž1996..
10
There is no denying that the quantification of the TFP, and its
allocation among various sources, is difficult. Consequently, our
results only correspond to what econometrics can offer at the
moment.
679
possible to link R & D expenditures to increases in
knowledge Žor technology., then to increases in pro-
ductivity ŽBernstein, 1996, p. 391., and finally to
changes in GDP. 11 This linear research model corre-
sponds to the product life cycle approach or to the
technological trajectory. 12 But since we do not need
to distinguish basic research from applied research, 13
our computations are also compatible with today’s
interlocking research continuum where the phases
are interwoven, blurred, etc. This is because so-called
‘basic research’ is now directed work in solving
questions arising late in a product-development cycle
ŽVandendorpe, 1997.. In turn, this multiplies the
channels used by researchers of innovative firms to
access scientific and technological inputs provided
by university and other public research centers
ŽFaulkner and Senker, 1995, pp. 90–91..
From the aggregate point of view, the pressure to
produce new knowledge Žtechnology. comes from
within the economic system. This is so because of
imperfect competition, where firms must continu-
ously generate or have access to new knowledge to
reestablish their competitive position ŽStephan, 1996;
Romer, 1994, p. 13., and also because knowledge
depreciates with the passage of time. 14
Whatever the model of innovation used, the role
of R & D expenditures can be captured by assimilat-
ing ‘R & D capital to a factor of production and as a
spillover source in determining output and productiv-
11
These relationships are pretty well assured. See for instance
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
technologies’ such as computers ŽHowitt and Aghion, 1997.. For
an historical perspective, see David Ž1990..
12
The linear model of innovation is still prevalent in some
industries such as the pharmaceutical industry ŽFaulkner and
Senker, 1995, p. 211; Vandendorpe, 1997..
13
As do ŽNelson and Romer, 1996, pp. 17 and 19. who feel that
it is not only difficult to separate these two notions, but also that it
is less necessary to do so today.
14
Since our goal is to disaggregate the GDP already produced,
this article does not deal with the adjustment mechanisms or
processes at work. Similarly, we do not have to examine in detail
the links between industry and universities as do Faulkner and
Senker Ž1995..
680 F. Martinr Research Policy 27 (1998) 677–687
ity growth’ ŽBernstein, 1996, p. 393.. Total factor
productivity ŽTFP. growth corresponds, then, to:
DTFP s Ž rg y 1 . Ž a l q b m q d k . q u t q m r q c s.
15
Ž 1.
This equation shows that with constant returns to
scale, a plausible hypothesis in the case of Canada
ŽBernstein, 1996, p. 403.,
DTFP s u t q m r q c s. Ž 2.
DTFP is consequently a function of various sources
of knowledge or technology. 16
The sources of the stock of knowledge, R, avail-
able locally are:
17
R s f Ž D,T , Is . Ž 3.
15
Source: adapted from Bernstein Ž1996. Žp. 395. where DTFP
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
production elasticities of rates of growth of factors of production:
l,m,k s factors of production: labour, intermediate inputs and
physical capital. u s the time trend that represents the rate of
technological change that is not immediately attributable to R&D
capital and spillovers ŽBernstein, 1996, p. 409, footnote 4.. r, ss
rates of growth of scientific capital and its spillovers, m and c
their production elasticities.
16
Although u is a separate variable in Eq. Ž1., in the long run
its role though circumspect ŽBernstein, 1996. is not divorced from
knowledge. Indeed, trend productivity can be defined as ‘the
capacity to absorb new technology and production practices devel-
oped and used elsewhere, . . . Žand. . . . changes in the quality of
inputs, . . . Žsuch. . . . as better educated workers’ ŽEconomic
Council of Canada, 1992, p. 22.. But education, experience or
trend productivity are a function of R&D activity Žpast and
present. since you need to be a competent and involved researcher
to ‘understand, interpret and appraise knowledge that has been put
on the shelf’ ŽRosenberg cited by Pavitt Ž1991., p. 112., whether
you want to innovate or simply imitate ŽFagerberg, 1994, p.
1161.. So that in a fundamental sense, all economic growth, even
growth that is directly caused by capital accumulation, can ulti-
mately be attributed to technological change ŽNelson and Romer,
1996, p. 14.. That means that ‘without knowledge, there would be
none of the other things’ ŽLipsey and Carlaw, 1996, p. 256.. This
is why DTFP can be attributed to the production of knowledge.
Admittedly, this conclusion is due to the choice of the variable
knowledge which was chosen to play the role of the residual Ži.e.,
the variable that accounts for the increase in productivity not
directly attributable to the other factors of production in a given
function.. But, as said above, this choice is logical given today’s
paradigm where growth is said to be increasingly driven by
knowledge generation.
And the undepreciated direct local contribution to
the stock of knowledge is:
y1
18
D s Ý Ž R & Dj . Ž 1 y d . Ž 4.
yn
2.4. The nature of the link between R & D and GDP
The link between R & D and GDP has two charac-
teristics.
Ž1. R & D is a generic term that covers the contri-
bution of the chain of R & D activities leading to new
products or processes, whether the innovation pro-
cess is linear Žbasic research is followed by applied
research. or an interlocking continuum. Here,
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-
penditures.
Ž2. The contribution of R & D expenditures Žlater
measured by their rate of return., is governed by the
facilitating structure 20 so that what is attributed to
17
Rsstock of knowledge available locally. Dsdomestic stock
of knowledge accumulated through previous R&D expenditures
Žcontributors to this stock include private, government and univer-
sity R&D.. T sstock of knowledge obtained from abroad by
international trade or multinational corporations; Is sspillovers of
international scientific capital Žobtained by means other than
trade.. The above are the three components of the IMF’S MULTI-
MOD model that Bayoumi et al. Ž1996. use to quantify the impact
of R&D expenditures.
18 y1
Ýyn R&Dj sdomestic R&D expenditure of country j done
from year y n to y1. ds rate of obsolescence of knowledge.
19
So that even if only a few Canadian manufacturing firms do
much of the research, they have an impact Žmeasured by their
spillovers. across the whole economy. For instance, the non-
manufacturing sector is a heavy user of innovations produced by
the manufacturing sector ŽMohnen, 1994, p. 19.. Furthermore, Eq.
Ž3. shows that the source of knowledge is not exclusively local.
20
The facilitating structure or ‘milieu’ includes variables at the
firm, industry and economy levels ŽLipsey and Carlaw, 1996, 256
ff pp.., such as the financial and institutional organization of the
production unit, the degree of concentration of the industry, public
sector institutions such as private property, infrastructures, demo-
graphics, regulations concerning labour markets, international trade
regulations, the quality of the labour force, etc. Žsee also Organisa-
´
tion de Cooperation ´
et de Developpement ´
Economique, 1996, p.
34.. All this corresponds to unobserved factors. Many of these
factors explain the Solow paradox ŽOrganisation de Cooperation ´
´
et de Developpement ´
Economique, 1996.. ŽGrossman and Help-
man, 1994, p. 31. also acknowledge the role of a ‘facilitator’.
 F. Martinr Research Policy 27 (1998) 677–687
R & D supposes and r or includes the indirect contri-
bution of the ‘milieu’. Consequently, the effective-
ness of R & D expenditures is maintained only so
long as the facilitating structure keeps pace with the
level of R & D.
3. The quantification of the contribution of do-
mestic R & D expenditures
The quantification of the contribution Žin an ac-
´
counting sense, see Organisation de Cooperation et
´
de Developpement ´
Economique, 1996, p. 29. of
domestic R & D expenditures to the Canadian GDP is
based upon the model presented in Section 2 above
and upon OECD computations. The procedure be-
gins by allocating a portion of the average rate of
growth Žperiod 1971 to 1993. of the Canadian GDP
to the TFP. Then, according to Eq. Ž3., it allocates
the TFP to its contributors: domestic R & D, foreign
R & D and foreign trade.
3.1. The importance of TFP in Canadian GDP
With the average growth rate of GDP at 3.25%
Žin real terms. and TFP being 20% of DGDP Žthe
rest being allocated to L and K., the contribution of
TFP or knowledge to the Canadian GDP of 1993 is
$73 billion Žin current Can$.. 21
3.2. Allocating to domestic R & D a portion of the
contribution of TFP to the growth of GDP
The further disaggregation of the GDP growth
due to various sources of knowledge into its compo-
nents presents even more problems, but a consider-
able amount of econometric work has already been
done: Ži. OECD suggests that 42% of the Canadian
TFP originates outside Canada for the 1980s
´
ŽOrganisation de Cooperation ´
et de Developpement
´
Economique, 1996, graph 2.6.. Presumably, that
covers foreign R & D spillovers and trade. Žii. Bay-
21
More precisely: $73.085304 billion. See Appendix A for
computations. This is a minimum; with the Divisia method the
contribution could reach $91.36 billion.
681
oumi et al. Ž1996. ŽTable 3. propose Žfor all indus-
trial countries. 21% of TFP originating in foreign
countries Žwith a negligible contribution from for-
eign trade.. Žiii. Mohnen Ž1994. Žp. 25. mentions
25% to 65% as the contribution of foreign countries
to TFP.
Missing is the contribution of Canadian R & D to
foreign countries or Canadian R & D done in foreign
countries. This is an asset since intra-firm transac-
tions over national borders begets reciprocity. Fur-
thermore, let us note that the above percentages,
arrived at through direct R & D expenditures, do not
give full credit to the fundamental role of domestic
R & D since, as said before, foreign R & D becomes
usable Žalbeit by incurring transaction costs. only as
long as there exists competent local researchers
themselves engaged in R & D activities and which
are at proximity ŽGrossman and Helpman, 1994, p.
39.. Otherwise, the spillovers do not materialize. In
the knowledge sphere, they remain a mass of innocu-
ous bits of information, and the potential of new
machines is not fully perceived or exploited.
For all of these reasons, we recognize the critical
role of domestic R & D by setting the foreign contri-
bution in R & D to the Canadian TFP at only 29%
Žthe average of the values of two of the sources
mentioned above plus the minimum of Mohnen. plus
2% for foreign trade ŽBayoumi et al., 1996., for a
total of 31%. The portion of the difference in Cana-
dian GDP between 1971 and 1993 that should be
allocated to Canadian R & D is consequently $50
billion. 22
In other words, $50 billion of the Canadian GDP
for 1993 Ž$712.9 billion. at market prices is derived
from knowledge produced in Canada. For many
people, attributing 7% of Canadian GDP for 1993 to
local knowledge is exaggerated. They hold ‘that the
resources spent on commercial research and develop-
ment are too small for business-generated technolog-
ical improvements to be the driving force behind
growth’ ŽGrossman and Helpman, 1994, p. 31.. In
the case of Canada, the objection is how can 1.5% of
GDP spent on R & D accounts for 7% of GDP in-
crease GDP?
22
That is, 73.085304=0.69s 50.428859 in current Can$.
682 F. Martinr Research Policy 27 (1998) 677–687
The answer lies in the recourse to the social rate
of return of R & D which includes the return to
innovators and the economic impact on users, those
affected through spillovers, and a host of unknown
indirectly affected beneficiaries.
There is an abundant literature 23 measuring the
social rate of return by country, by group of indus-
tries and by group of firms, etc. Figures vary consid-
erably, but a rate of return of 30% seems a reason-
able approximation. It also seems to fit the Canadian
case since a simulation involving a yearly R & D
investment of 1.5% of GDP starting in 1971, a social
rate of return of 30% and a useful life of 7 years for
innovations, makes the GDP grow Žin real terms. up
to 1993, at a rate of 3.25%, which is exactly what
has happened. Note that the social rate that connects
the initial R & D expenditures to the eventual GDP
increase, takes for granted the contribution of re-
sources provided by the ‘milieu’ Žstimulated by R & D
expenditures., i.e., users, those affected by spillovers
and the rest of the economy. R & D expenditures are
then seen as the catalyst to growth. Provided that its
social rate of return holds, 24 the R & DrGDP ratio
can be used as a benchmark against which individual
firms or countries compare their own level of R & D
expenditures and eventually make decisions. 25 It is
then part and parcel of the decision-making process.
Yet, in no way is it implied that by simply changing
the level of R & D expenditures will sales or the GDP
change by the benchmark multiplier, since the im-
pact depends upon an a priori unknown social rate of
return. 26
23
For example, Mansfield et al. Ž1977., Mohnen Ž1994., Bern-
stein Ž1996., etc.
24
Being an average measure of impact, the ratio covers both
successful and unsuccessful R&D projects. Thus, the multiplier
derived from the ratio cannot be used for a single project.
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-
tively 21%, 16.9%, 18.5%. Source: Schonfield et al. Ž1996.. It is
the value added that is compatible with GDP.
26
This is illustrated by the simulation of Bayoumi et al. Ž1996.
ŽTable 1., where, for a sustained increase of 1r2 of 1% in the
R&DrGDP ratio for the US, there follows an increase Žcompared
to the baseline. of 4.2% of GDP after 15 years and of 7.1% after
35 years. They implicitly assume that the previous social rate of
return prevails during the simulation.
4. Quantifying the contribution of university R & D
Having established that $50 billion of the 1993
GDP can be imputed to Canadian generated knowl-
edge, the task is now to allocate a portion of this
amount to university R & D.
Because there are others contenders Žprivate and
government laboratories., the usefulness of univer-
sity research must first be established, at least in
general terms since: Ži. few academic results, directly
and immediately, contribute to innovation, and Žii.
university R & D produces by-and-large non-ap-
propriable knowledge, e.g., new ideas ŽHowitt, 1996,
pp. 15–16.. No wonder then that this contribution is
labelled ‘minor’ ŽFaulkner and Senker, 1995, p. 206..
At the same time university R & D is highly valued
and even considered important by: Ži. lobbyists of
the business sector who urge the government to
generously finance university research, especially the
risky and exploratory kind ŽVandendorpe, 1997.; Žii.
the business sector which finances 31.3% of univer-
sity research Žin Quebec, Canada in 1993–1994.;
and Žiii. the innovation studies that ‘confirm that
academic and government laboratories make a signif-
icant knowledge contribution to innovation’
ŽFaulkner and Senker, 1995, p. 41..
Indeed, universities make knowledge Žbasic and
applied. available to the Canadian economy, thus
increasing its productivity by: Ži. ameliorating the
supply of human capital Žgraduate students.; 27 Žii.
their own research Žfundamental or applied.; and Žiii.
the consulting activities of their teachers and star
researchers ŽMansfield and Lee, 1996, p. 1056.. By
doing so they attract, retain and generate high-tech
industries.
Second, the quantification per se uses the two
channels that connect university R & D with the GDP:
Ž1. The enhanced productivity of human capital Žthe
27
As is often said, the ‘primary role . . . Žaccording to Martin
and Irvine, 1981. . . . of universities is in the education of qualified
scientists’ ŽFaulkner and Senker, 1995, p. 20.. This is echoed by
Nelson and Romer Ž1996. Žpp. 19–20. and by Vandendorpe
Ž1997.. Yet, this does not confine universities to the classroom
since teaching and research are not separate activities. Indeed,
highly trained graduates cannot be developed without the faculty
itself being highly involved in research.
 F. Martinr Research Policy 27 (1998) 677–687
differential income of university graduates.. 28 This
differential output 29 is part of the $50 billion of
GDP imputed to Canadian knowledge. Ž2. The en-
hanced productivity of the rest of the economy: firms
that finance a good portion of university research,
spin-offs and firms that benefit freely from spillovers.
4.1. Measurement of the contribution of uniÕersity
R & D through the enhanced productiÕity of human
capital
The enhanced productivity of university graduates
Žhigher degrees. is put at $7.7 billion ŽCan$.. 30
However, this amount cannot be entirely credited to
universities since this increase in productivity Ždue to
the generation and transfer of knowledge. is the
result of two contributing factors:
Ža. students who contribute tuition fees, subsis-
tence expenditures and foregone income Žfor those
that study full time.;
Žb. university expenditures.
By weighting the expenditures of each contributing
factor, the share of universities amounts to 35%. 31
That means that the contribution of university
R & D through the differential productivity of their
graduates to the Canadian GDP is:
$7.7 = 0.35 s $2.7 billion Ž Can$ . .
4.2. Measurement of the contribution of uniÕersity
R & D through the enhanced productiÕity of other
factors of production
From Section 3.2, the portion of the Canadian
GDP derived from access to knowledge produced in
28
Here we are only considering the added productivity stem-
ming from university research, i.e., the difference between the
output Žincome. of graduates with higher degrees and the output
of those with only a first degree. As said before, we suppose that
higher degrees cannot be produced without university research
and adequate facilities. Note that measuring the contribution of
university R&D through the differential income of its graduates
somewhat underestimates its contribution for two reasons: Ži. the
substitution of new technologies for old ones requires more
education ŽNelson, cited by Fagerberg, 1994, p. 1153., Žii. gradu-
ates Žhigher degrees. produce spillovers that ameliorate the pro-
ductivity of other employees ŽGlaeser, 1996, p. 73..
29
This contribution is net of the necessary remuneration of the
other cooperating inputs.
30
See Appendix B.
31
See Appendix C.
683
Canada having been set at $50.4 billion and having
already allocated $7.7 billion of this output to uni-
versity graduates, a reasonable but imperfect basis to
allocate the remainder to university research is to use
its relative importance in all R & D in Canada, i.e.,
30%. 32 The share of university R & D is then:
$42.693711 = 0.30 s $12.808113
4.3. The total contribution of uniÕersity R & D to the
change in Canadian GDP (1993)
Its contribution to the human 2.707302
capital Žbillion Can$.
Its contribution to other economic 12.808113
agents Žbillion Can $.
Total Žbillion Can$. 15.515415
5. Conclusion
It is commonplace to say that university research
has the potential to produce breakthrough advances
that can fundamentally alter economic growth, even
if not all of the research leads to world-changing
results.
This article has shown that the stream of new
ideas and technologies stemming from universities
translates, when its economic impact is measured
through the dynamic approach, into an appreciable
growth in GDP and employment.
32
Strictly, the relative importance of university expenditures is
26.36% since direct university R&D is $2.0513 billion, while total
Canadian R&D is $7.7828 billion PPA US$ ŽOrganisation de
´
Cooperation ´
et de Developpement ´
Economique, 1994, pp. 52 and
54.. We have marginally increased this percentage to 30% for the
same reasons that we have also marginally augmented the relative
importance of Canadian general R&D expenditures in GDP ŽSec-
tion 3.2.. One reason is that the less the knowledge is appropri-
able, the greater the spillovers Ži.e., the less the expenditures
approach accounts for the real impact.. This is especially the case
of fundamental research where big payoffs are eventually traced
to such research ŽMurphy, 1996, p. 4.. This is complicated by the
fact that only a very small portion of the basic knowledge
produced by universities is either patented or patentable
ŽTrajenterberg et al., 1992, p. 18..
684 F. Martinr Research Policy 27 (1998) 677–687
Furthermore, since university research accelerates
at least the development of new products, countries
that support it secure a favourable position in a
knowledge-intensive, globally competitive market-
place.
Acknowledgements
This article is based upon a study made for the
Association of Universities and Colleges of Canada
ŽA.U.C.C... The author has benefited from docu-
ments and advice provided by Herb O’Heron of
A.U.C.C. and from Ronald Rioux of Statistics
Canada. My colleagues Robert Lacroix, Marcel Da-
genais and François Vaillancourt have also helped
me. Peter Hanel of the Universite´ de Sherbrooke and
Pierre Mohnen of UQAM have criticized the paper.
Of course, none of the above mentioned people are
responsible for any errors or omissions.
Appendix A. Computation of the portion of the
Canadian GDP 1993 accounted for by total factor
productivity
The computations are based upon the average rate
of growth of the GDP from 1971 to 1990 compiled
by OECD. It is assumed that this rate of growth
applies also up to 1993, thus for 22 years:
1.0325 22 = 286.998 Ž billion Can$ 1986, for the
year 1971 . s 580.04253 Ž billion $ 1986 for the
year 1993 . .
´
Sources: Organisation de Cooperation ´
et de Develop-
´
pement Economique Ž1996. Žp. 29. and Statistics
Canada ŽCat. 11210XPB, p. 7..
The increase in GDP from 1971 to 1993 in 1986 $
is:
580.04253 y 286.998 s 293.04453 Ž billion $ 1986 . .
Transformed in $ 1993:
293.04453 = 1.247 Ž the GDP price index of 1993
in terms of $ 1986 .
s 365.42652 Ž billion Can$ 1993 . .
Source of price index: Statistics Canada ŽCat.
11210XPB, p. 42..
The portion allocated to TFP is then:
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
´
de Developpement ´
Economique, 1996, p. 29. or
from a statement on p. 28. Žibid... That means that in
the GDP of 1993, $73.1 billion is attributable to the
cumulative effect of TFP since 1971. ŽWe do not
credit TFP for any influence before 1971; we are
consequently underestimating the influence of tech-
nological progress..
This is also a minimum ŽOrganisation de
´
Cooperation ´
et de Developpement ´
Economique,
1996, p. 28., since with the Divisia method the
contribution would be 25% Žibid., p. 273.. That
means that the contribution of TFP to GDP could be
as high as 91.36 Žbillion $ 1993..
Appendix B. Measurement of the additional pro-
ductivity of university graduates
The additional productivity of graduates Žhigher
degrees. is measured by their differential income. In
Canada Žsource: Statistics Canada, 1994, Cat. 13-
217., the average income of a person with a univer-
sity degree is $58,691ryear for men, and
$41,730ryear for women, for an average Žcomputed
by the author. of $51,787ryear. On the other hand,
the average income of those people in the category
just below a university degree is $36,711ryear. The
increase in income due to a university degree is then
$15,076ryear.
The increase Žconsidering the working life. is
greater for higher and professional degrees than for
BA degrees, and for men compared to women. For
men Žused as an index., Hecker Ž1995. Žp. 4, Table
1. puts the increase in income of a BA at $4000 less
than the average increase in income for all degrees.
For MA degrees, the increase in income is $3000
more than the average for all degrees. It is of course
considerably more for PhD and professional degrees,
but there are fewer people in this category. Their
relative importance is thus small and as such ne-
 F. Martinr Research Policy 27 (1998) 677–687
glected. Something similar affects the income of
women with degrees.
In the absence of more information we put the
differential of income of MAs, PhDs and profes-
sional degrees at $4924 Žto eventually have round
numbers. over the average differential in income due
to a university degree. Thus, the average income of
MAs, PhDs and professional degrees is 36,771 q
Ž15,076 q 4924. s $56,711.
The average income of BA degree holders is
computed as a residue in the following computations.
Step one: The differential income of all university
graduates ŽBA q MA q PhD q professionals. is:
$15,076 33 = 2,419,750 34 s $ 36,479,751,000.
Step two: Already the MA, PhD and professional
degrees account for $16,679,500,000. 35 That means
that the remaining 1,585,775 BA degrees account
for Ž 36,479,751,000 – 16,679,500,000 . , i.e.,
19,800,251,000. Then, 19,800,251,000 % 1,585,775
yields $12,500 Žin round numbers. per BA degree, or
an income of 36,711 q 12,500 s $49,211. 36
A higher degree provides, then, $7500 of yearly
income more than a BA degree. That represents the
net contribution of graduate studies and at the same
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-
edge, it remains that without being nourished by
research BA teaching would stagnate. That means
that this teaching is still to a small extent Žfor
instance, one fourth. tributary to research. Indeed,
many teachers teach at both the undergraduate and
graduate levels. Furthermore, undergraduates profit
33
The average increase in income due a university degree
Žcomputed before..
34
According to Statistics Canada, Cat. 93329, 1991, there are in
Canada 833,975 MA and higher degrees, and 1,585,775 BA
degrees, for a total of 2,419,750 degree holders.
35
833,975=Ž15,076q4924. s$16,679,500,000.
36
The Canadian data seem to give Žfor BA graduates. relatively
higher numbers than the US data as provided by Hecker Ž1995.. It
is the contrary for MA and PhD degrees. Besides the different
labor markets, one explanation for the discrepancy is the fact that
Hecker dealt with the year 1991, and Stat. Can. with 1993.
Because of lack of data, and because our interest is mainly
methodological, our aim is only to produce satisfactory figures.
685
from better libraries, laboratories, equipment, etc.
The ranking of universities testifies to that point.
Consequently, the way to account for the contri-
bution of R & D activities to BA degrees is to credit
universities with 25% of the increase in income
Žproductivity. of a BA degree Ž$12,500 to R & D,
i.e., $3125..
For Canada, as a whole, the yearly increase in
productivity originating in university graduates is
then:
833,975 Žgraduates with 6,254,812,500
higher degrees. = $7500s
1,585,775 Žgraduates with 4,955,546,875
BA degrees only. = $3125s
Total 11,210,359,375
But as shown in Section 3.2, approximately 69%
of this amount can be imputed to local R & D, since
31% of knowledge is from foreign sources. Conse-
quently, the change in GDP that can be attributed to
a change of knowledge through graduate students
originating in universities is:
$11,210,359,375 = 0.69 s 7.73514796875
billion Ž Can $ . .
Appendix C. Share of universities in the differen-
tial productivity of university graduates (higher
degrees)
The share of universities in the provision of a
higher university degree comes from the costs they
incur compared to the costs supported by the stu-
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
typical graduate student 37 are as follows.
The average annual cost incurred by the univer-
sity to train a student of a higher degree Ža weighted
average of MA and PhD degrees. was, for the year
1993–1994, $16,928.
Since the average length of studies for a higher
degree is 5.0118 semesters, and the typical student
uses the university services during 2.25 semesters
37
The figures come from the Universite´ de Montreal,
´ presum-
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
is:
$16,928 = Ž 5.0118r2.25 . s $37,707 per student
Žb. The opportunity cost incurred by a student for
a higher degree: Ži. tuition fees: $1400rsemester=
5.0118 semesters Žper student. s $7016. Žii. The op-
portunity cost in terms of lost income is based upon
three hypotheses. Ž1. As a BA graduate, the student
could have earned $33,000ryear or $2750rmonth,
had he not pursued his studies at the MA or PhD
level. Ž2. His affiliation with the university would
have lasted:
5.0118 semesters
s 2.227466 years or
2.25 semestersryear
26.729599 months.
Ž3. The student takes either short vacations or works
a small portion of hisrher time while affiliated with
the university, so that only 84.37496% of the period
represents lost income. Hisrher opportunity cost is
then: 26.729599 = 0.8437496 = $2750 s $62,021
plus Žiii. supplementary incidental expenditures Žs
631., total: $69,668 Žc.. The share of the university
in the total cost of a higher degree:
37707
s 0.3511 rounded at 0.35.
37707q 69668
References
Acs, Z.J., Audretsch, D., Feldman, M., 1992. Real effects of
academic research: comment. American Economic Review 82
Ž1., 363–367.
Bayoumi, T., Coe, D.T., Helpman, E., 1996. R&D spillovers and
global growth. Working Paper no. 79, The Canadian Institute
for Advanced Research, Toronto.
´
Ben Ali, D., Martens, A., 1993. Analyses de politiques econ-
´ au Maroc. Manuscript, GREI, University
omiques appliquees
of Mohammed V, Rabat.
Berman, E.M., 1990. The economic impact of industry-funded
university R&D. Research Policy 19, 340–355.
Bernstein, J.I., 1996. The Canadian communication equipment
industry as a source of R&D spillovers and productivity
growth. In: Howitt, P. ŽEd.., The Implications of Knowledge-
Based Growth for Micro-Economic Policies. University of
Calgary Press, Calgary, pp. 391–411.
David, P.A., 1990. The dynamo and the computer: an historical
perspective on the modern productivity paradox. American
Economic Review 80 Ž2., 355–361.
Economic Council of Canada ŽECC., 1992. Pulling Together.
Minister of Supply and Services, Ottawa.
Fagerberg, J., 1994. Technology and international differences in
growth rates. Journal of Economic Literature 32 Ž3., 1167–
1175.
Faulkner, W., Senker, J., 1995. Knowledge Frontiers. Clarendon
Press, London.
Glaeser, E.L., 1996. Why economists still like cities. City Journal
6 Ž2., 70–77, Spring.
Grossman, G.M., Helpman, E., 1994. Endogenous innovation in
the theory of growth. Journal of Economic Perspectives 8 Ž1.,
23–44.
Hecker, D.E., 1995. Earnings of College Graduates. Monthly
Labor Review 188 Ž12., Bureau of Labor Statistics, Depart-
ment of Labor, Washington, DC.
Howitt, P., 1996. On some problems in measuring knowledge-
based growth. In: Howitt, P. ŽEd.., The Implications of
Knowledge-Based Growth for Micro-Economic Policies. Uni-
versity of Calgary Press, Calgary, pp. 9–29.
Howitt, P., Aghion, P., 1997. Macroeconomic Adjustment to
General Purpose Technologies. Keynote Address, May 15, le
37 e Congres ` annuel, Societe´ ´ Canadienne de Science Econ- ´
omique, Montreal. ´
´ A.B., 1989. Real effects of academic research. American
Jaffe,
Economic Review 79 Ž5., 957–970.
Lipsey, R.D., Carlaw, K., 1996. A structuralist view of innovation
policy. In: Howitt, P. ŽEd.., The Implications of Knowledge-
Based Growth for Micro-Economic Policies. University of
Calgary Press, Calgary, pp. 255–332.
Mansfield, E., 1991. Academic research and industrial innovation.
Research Policy 20, 1–12.
Mansfield, E., Lee, J.Y., 1996. The modern university: contribu-
tion to industrial innovation and recipient of industrial R&D
support. Research Policy 25, 1047–1058.
Mansfield, E., Rapoport, J., Romeo, A., Wagner, S., Beardsley,
G., 1977. Social and private rates of return from industrial
innovations. Quarterly Journal of Economics, May, 221–240.
Martin, F., 1996. Les retombees ´ economiques
´ ´ de
des activites
recherche de l’Universite´ de Montreal ´ et des ecoles,
´ ˆ
hopitaux
´ Vice-rectorat a` la recherche et a` la planifi-
et instituts affilies.
cation, Universite´ de Montreal,
´ Montreal. ´
Martin, F., 1997. The Economic Impact of Canadian University
R&D Activities. AUCC, Ottawa.
Martin and Irvine, 1981.
Mohnen, P., 1994. The Econometric Approach to R&D Externali-
ties. UQAM, cahier no. 9408, Montreal. ´
Murphy, R.A., 1996. Government policy and university science:
starving the golden goose. Killam Address, Canadian Associa-
tion of Graduate Studies, University of Calgary, Calgary.
Narin, F., Hamilton, K.S., Olivastro, D., 1997. The increasing
linkage between US technology and public science. Research
Policy 26 Ž3., 317–330.
Nelson, R.R., Romer, P.M., 1996. Science, economic growth, and
public policy. Challenge, March-April, 9–21.
Organisation de Cooperation´ ´
et de Developpement ´
Economique,
´
1992. La technologie et l’economie—Les ´
relations determi-
nantes, Paris.
 F. Martinr Research Policy 27 (1998) 677–687 687

´
Organisation de Cooperation ´
et de Developpement ´
Economique Romer, P.M., 1994. The origins of endogenous growth. Journal of
ŽOCDE., 1994. Statistiques sur les pays membres en chiffres. Economic Perspectives 8 Ž1., 3–22.
´
Supplement a` l’observateur de l’OCDE 188, Juin–Juillet, Paris. Schonfield et al., 1996. R&D Ratios and Budgets 1996. Research
´
Organisation de Cooperation ´
et de Developpement ´
Economique, Technology Management, nos. 5 and 6.
1996. Technologie, Productivite´ et Creation
´ d’emplois, Vol. 2. Stephan, P., 1996. The economics of science. Journal of Eco-
Rapport Analytique, Paris. nomic Literature 34, 1199–1235.
Pavitt, K., 1991. What makes basic research economically useful?. ´ A., 1992. Ivory Tower
Trajenterberg, M., Henderson, R., Jaffe,
Research Policy 20, 109–119. versus Corporate Lab: an empirical study of basic research and
Poole, E., 1993. A guide to using the input–output model of appropriability. N.B.E.R., Working Paper no. 4146.
statistics Canada, 58E. Technical Series. Statistics Canada, Vandendorpe, L. ŽEd.., 1997. Basic Research White Paper, R&D
Ottawa. Magazine.