PATRONES DE APILAMIENTO Y CICLOS ESTRATIGRÁFICOS

This section outlines the sample, variables, modelling and procedures used in this empirical study. To test the four hypotheses, a sample of 69 countries, 37 high-income and 32 upper middle-income, was selected on the basis of the countries’ grouping from the World Bank. Rational choice of sample is the key issues of reliability and credibility for conceptualising and generalising the findings (Stake, 1994; Saunders et al., 2003; Gerring, 2004). Is the sample of high income and upper-middle income economies, excluding low income economies is reliable to generalise significant institutional and policy determinants of national technology capabilities across countries? The reasons why this study omitted lower-middle income and low income countries are, because the countries’ institutional conditions for national technology capabilities are little important due to almost no reliance on innovation and technological change to increase income, production and export. Even in innovation input and output indicators used here as dependent variables most low-income countries showed practically no R&D investments and zero count of patents granted at the USPTO (USPTO and UNESCO statistics), thus I feel justified in ignoring them.

The criterion of classification of high income and upper-middle income countries was GNI per capital in 2009, calculated by using the World Bank Altas method. The World Bank classifies 70 countries into high-income economies by 2009 GNI per capita of $12,196 or more, while 54 upper middle-income economies are those in which GNI per capita was between $3,946 and $12,195. The reason why I ended up with only 69 countries out of the total of 124 high-income and upper middle-income countries in the World Bank classification is because some small economies (e.g., Cayman Islands, French Polynesia) and some centrally planned economies (e.g., Dominica, Libya) were excluded due to data unavailability as well as comparability issues in terms of time frame, variables and the like. Also, US data are omitted due to a big numerical difference with

other countries in terms of patent production and R&D expenditures. In the dataset, total patents in the United States numbered 89,869,327 whereas only 5 were granted at the US Patent and Trademark Office (USPTO) for Albania (the lowest country) from 2006 through 2010. Likewise, on average from 2005 through 2009, the United States spent more than US$368 million for R&D whereas the amount of R&D spending in Bosnia and Herzegovina (the lowest countries) was only US$6.632. Table 5.2 shows a list of samples included and excluded in this study.

Table 5.2 List of Sample

Inclusion Exclusion

High-income Economies

Australia, Austria, Belgium, Canada, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Israel, Italy, Japan, Korea (Rep.), Luxembourg, Netherlands, New Zealand, Norway, Poland, Portugal, Slovak Republic, Slovenia, Spain, Sweden, Switzerland, United Kingdom, Croatia, Curacao, Hong Kong SAR (China), Kuwait, Malta, Singapore, Trinidad and Tobago

Andorra, Aruba, Bahamas, Bahrain, Barbados, Bermuda, Brunei

Darussalam, Cayman Islands, Channel Islands, Cyprus, Equatorial Guinea, Faeroe Islands, French Polynesia, Gibraltar, Greenland, Guam, Isle of Man, Liechtenstein, Macao SAR (China), Monaco, New Caledonia, Northern Mariana Islands, Oman, Puerto Rico, Qatar, San Marino, Saudi Arabia, Sint Maarten (Dutch part), St. Martin (French part), Turks and Caicos Islands, United Arab Emirates, Virgin Islands (U.S.), United States Upper

Middle- income Economies

Albania, Algeria, Argentina, Azerbaijan, Bosnia and Herzegovina, Brazil, Bulgaria, Chile, China, Colombia, Costa Rica, Dominican Republic, Ecuador, Gabon, Iran (Islamic Rep.), Jordan, Kazakhstan, Latvia, Lithuania, Malaysia, Mauritius, Mexico, Panama, Peru, Romania, Russian Federation, Serbia, South Africa, Thailand, Tunisia, Turkey, Uruguay

American Samoa, Antigua and Barbuda, Belarus, Botswana, Cuba, Dominica, Grenada, Jamaica, Lebanon, Libya, Macedonia (FYR), Maldives, Mayotte, Montenegro, Namibia, Palau, Seychelles, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Suriname,

Venezuela (RB)

Total 69 55

With the sample of 69 countries, the two innovation input and output indicators that are widely used in existing empirical studies on innovation were employed as dependent variables. As a proxy of national technology investment, the countries’ data on gross domestic expenditure on R&D (GERD) was collected for 2005 through 2009 from

the database of UNESCO institutes. As a proxy of national technology creation, the data of patents granted at the USPTO were employed. The counts of US patents granted by country of origin based on the residence of the first-named inventor from 2006 through 2010 were collected from the database of the USPTO. The average monetary value of R&D was used for 5 years due to a large missing value, while the total count of patents was used for 5 years due to a cumulative effect. The time frame of GERD was from 2005 through 2009 and the patent was from 2006 through 2010, with a time lag of one year to four years since innovation results from the inherently complex nature of innovation activities are time consuming, risky and uncertain. Table 5.3 presents a description of variables used in this study.

All independent variables, comprising institutional and policy factors related to economic liberalisation, were taken from EFW 2011 annual report for 2006 through 2009. As many renowned economists, including Adam Smith, Milton Friedman and Friedrich Hayek, have mentioned, voluntary exchange and market coordination are the engines of economic growth. Policies and institutions supporting freedom of personal choice, exchange, competition and entrepreneurial activity coordinated through markets are important sources of long-term growth (EFW, 2011). The EFW annual report provides the degree to which the policies and institutions of various countries support economic liberalisation. It attempts to make a synthetic index of economic freedom of countries by combining five areas: size of government; regulation of credit, labour and business; freedom to trade internationally; legal structure and security of property rights; and access to sound money. According to the EFW index, Hong Kong has the highest rating for economic freedom, 9.01 out of 10 in 2010. The other open economies among the top ten are Singapore (8.68), New Zealand (8.20), Switzerland (8.03), Australia (7.98), Canada (7.81), Chile (7.77), the United Kingdom (7.71), Mauritius (7.67) and the United States (7.60). The bottom ten nations, relatively closed economies, probably linked to centrally

planned economies are Zimbabwe (4.08), Myanmar (4.16), Venezuela (4.28), Angola (4.76), Democratic Republic of Congo (4.84), Central African Republic (4.88), Guinea- Bissau (5.03), Republic of Congo (5.04), Burundi (5.12) and Chad (5.32).

The EFW data have been widely used in many academic studies to examine the causal or correlation relationship between economies’ freedom and various measures of economic and social performance, such as investment, income, GDP growth, human welfare and entrepreneurship (see Table 5.1). This study employed the EFW data of government size, regulation (credit, labour and business) and regulatory burden of overseas trade as independent variables while introducing the monetary system, and legal structure and property rights, as control variables. Also, size of government used a moderator of government regulation and trade barrier effects on national technology capabilities since their interaction influences the strength of the relationship between dependent variables (patent and R&D expenditures) and independent variables (government regulation and trade barriers).

Table 5.3 Description of Variables

Description Year Source

Dependent Variables

Patent Data is taken from numbers of patents granted at USPTO during the periods of 2006-2010. The

total count of each country’ patent data is used for 5 years. 2006 -2010

US Patent Trademark Office http://www.uspto.gov/patft/ R&D

Expenditure

Data of gross domestic intramural expenditure on R&D in current PPP$ is taken from UNESCO institute during the period of 2005-2009. Logarithmic of average value of each country’s R&D investment is used for 5 years.

2005 - 2009

United Nations Educational, scientific and Cultural Organization http://www.uis.unesco.org/ Independent Variables Regulations of Credit, Labor and Business

First, credit market controls and regulations are measured by three sub-components (i) the percentage of bank deposits held in privately owned banks; (ii) foreign bank competition estimated by foreign bank assets as a share of total baking sector assets; (iii) private sector credit calculated by the share of domestic credit allocated to the private sectors; (iv) determinants of interest rates. The ratings are from 0 to 10. The larger share of privately held deposits and domestic credit, the larger share of foreign bank, and interest rates determined by market forces with positive real rates (the large difference among the deposit and lending) are given the high rating, 10. Second, labour market regulations are estimated by (i) minimum wage calculated by the ratio of mandated minimum wage to the average value added per worker; (ii) hiring and bargaining regulation; (iii) centralised collective bargaining; (iii) mandated cost of hiring measured as a percentage of salary; (iv) mandated cost of worker dismissal measured in weeks of wages; (v) the length of conscription. These sub-components are calculated the zero-to 10 rating. The lower mandated minimum wage, the hiring by no obstructive regulation, wage-setting by no centralized bargaining process and no military conscription receive 10. Third, business regulation estimated by (i) price controls; (ii) administrative requirements; (iii) bureaucracy costs; (iv) the time and money costs to start a business; (v) undocumented extra payments and bribes; (vi) the

2005 - 2009

Economic Freedom of the World 2011 Annual Report

http://www.freetheworld.com/rel ease.html

time and money costs for licensing; (vii) the time cost of tax compliance. The scale of six sub- components is from 0 to 10. None price control, none burdensome administrative requirements and the lower time and money costs for start-up business, licensing and tax compliance are given the highest value of 10. These different three regulations (credit markets, labour market and business) are set by zero-to 10 ratings and then averaged to construct the regulation index.

International Free Trade

The constitutions of trade liberalisation are: i) taxes on international trade comprised by taxes on international trade as a share of exports and imports, the unweighted mean of tariff rates and standard deviation of tariff rates; (ii) regulatory trade barriers measured by non-tariff barriers and the time cost values to exports and imports a good; (iii) the actual size of the trade sector relative to expected; (iv) black-market exchange rates measured by the percentage difference between the official and the parallel market exchange rate; (v) International capital market control estimated by the restriction of foreign ownership and FDI. The lower average tax rates, the lower regulatory barriers, the larger trade sectors relative to the expected size, the lower black market exchange rates and the lower international capital market controls set a high value on the freedom of international trade. These components underlying of the free trade are averaged then calculated the zero to 10 rating for each country: (observation maximum value − the country’s actual value) / (observation maximum value − observation minimum value) multiplied by 10. The average value of each country’s index is used for 2005-2009.

2005- 2009

Economic Freedom of the World 2011 Annual Report

http://www.freetheworld.com/rel ease.html

Size of Government

Government size is measured by four components: (i) the general government consumption spending as a percentage of total consumption; (ii) the general government transfers and subsidies as a percentage of GDP; (iii) State owned enterprises (SOEs) output and government investment as a share of total output and investment; (iv) top marginal income and payroll tax rate. The large government size that is high proportion of government expenditure, transfer sector, investment and taxes is obtained the lower value. The valuation of government size for each country under 0 to 10 scale calculating by the (observation maximum value − the country’s actual value) / (observation maximum value − observation minimum value) multiplied by 10. The average value of each country’s index is used for 2005-2009.

2005 - 2009

Economic Freedom of the World 2011 Annual Report

http://www.freetheworld.com/rel ease.html

Control Variables

GDP per capita GDP per capita based on purchasing power parity (PPP), which is converted to current international dollars using PPP rates. Logarithmic of average value of each country’s GDP per

2005- 2009

World Bank

capita is used for 5 years.

GDP Growth Annual percentage growth rate of GDP at market prices based on constant local currency. Average

percentage of each country’s annual GDP growth rate is used for 5 years. 2005-2009

World Bank

http://data.worldbank.org/ Population

Growth

Annual population growth rate. Average percentage of each country’s annual population growth rate is used for 5 years.

2005- 2009

World Bank

http://data.worldbank.org/ Education Level The counts of the tertiary or higher education enrollment counts in all programmes devoting to

advanced research and professions are collected as a proxy of education level. Logarithmic of average value of each country’s tertiary enrolment count is used for 5 years.

2005- 2009

United Nations Educational, scientific and Cultural Organization

http://www.uis.unesco.org/ Access to

Sound Money

Access to sound money is measured by four components: (i) the average annual growth of the money supply in the last five years minus average annual growth of real GDP in the last ten years; (ii) the standard deviation of the inflation rate over the last five years; (iii) the rate of inflation during the most recent year; (iv) freedom to own foreign currency bank accounts. The scale of six sub-components is from 0 to 10. The country receives a rating 10 if that money growth was equal to the long-term growth of real output with no variation in the rate of inflation over the five-year period, perfect price stability and no restrictions on foreign currency bank accounts. The average value of each country’s index is used for 2005-2009.

2005- 2009

Economic Freedom of the World 2011 Annual Report http://www.freetheworld.com/rel ease.html Legal Structure and Property Rights

Legal structure and security of property rights are measured by seven components: (i) Judicial independence; (ii) impartial courts; (iii) protection of property rights; (iv) Military interference in rule of law and the political process; (v) Integrity of the legal system; (vi) Legal enforcement of contracts; (vii) Regulatory restrictions on the sale of real property. The scale of six sub- components is from 0 to 10. The country receive a 10 rating if the legal framework is efficient and follows a clear, neutral process with entirely Judicial independence, well-protection of property, no involvement of military in politics, impartiality of the legal system and no restrictions on transfer ownership of property. The average value of each country’s index is used for 2005-2009.

2005- 2009

Economic Freedom of the World 2011 Annual Report

http://www.freetheworld.com/rel ease.html

In detail, the first predictor of government regulation was measured by restriction on market entry to engage in voluntary exchange. The three markets of credit, labour and product were considered as sub-indexes of government regulation to examine their linkages to national technology creation and investment. The credit market regulation index was calculated with four components: share of privately owned bank deposits, foreign bank assets as a share of total banking sector assets, share of domestic credit allocated to private sectors and determinants of interest rates. The regulatory components indicated the extent to which the banking industry is dominated by private firms, whether foreign banks are allowed to enter and compete in the market, which credit is supplied to the private sector and whether interest rates interfere with the market in credit. The labour market regulation index was calculated with six components: the ratio of mandated minimum wage to the average value added per worker, hiring and bargaining regulations, centralised collective bargaining and mandated cost of hiring measured as a percentage of salary, mandated cost of worker dismissal measured in weeks of wages and the length of conscription. The regulatory components indicated the extent to whether wages and hiring (or firing) conditions are determined by economic freedom of employees and employers, and whether conscription interferes with the market in labour. The business (product market) regulation index was calculated with six components: price controls, administrative requirements, bureaucracy costs, time and money costs to start a business, undocumented extra payments and bribes, time and money costs for licensing and time cost of tax compliance. The components were designed to identify the extent to which regulations and bureaucratic procedures restrain pricing decisions, competition and new business entry.

The value of each component was established by 0 to 10 ratings and combined to form the index of credit, labour and business regulation. The three indexes were individually used as an independent variable. They were also united in a synthetic index

of regulation so as to examine the general impact of regulation on dependent variables. The regulation variables from 2006 through 2009 were averaged due to the missing value problem. The country with a tight regulatory restraint that limits the freedom of exchange in credit, labour and product markets was given the lowest value of zero.

The second predictor of the international trade barriers index was created by the combination of five components: taxes on international trade as a share of exports and imports, the mean of and standard deviation of tariff rates, non-tariff barriers and the time cost values to export and import a good, the actual size of the trade sector relative to expected black market exchange rates, the restriction of foreign ownership and FDI. Tariffs, quotas and hidden administration of customs, and controls on exchange rate and capital movement can limit international trade. With 0 to 10 ratings, the index of trade barrier was created by integrating the five components. The average value of the summary index was used with the time frame of 2005 through 2009. The country with tight trade restrictions was given the lowest value, zero.

The third predictor of government size index was formed by combining five components: government consumption spending as a percentage of total consumption, government transfers and subsidies as a percentage of GDP, SOE output and investment as a share of total output and investment, top marginal income and payroll tax rate. These components indicated the extent to which a country relies on the political process to allocate resources, whether the public sector plays the dominant role in the production of goods and services and which high marginal tax rates apply at relatively low income levels. On the scale of 0 to 10, a country with more government spending as a share of total spending, a larger government enterprise sector and higher marginal tax rates earned the lowest ratings. The average value of the government size index was used for 2005 through 2009. The index of the government size was also used as a moderator of government regulation and international trade barrier effects on national technology

capabilities.

Regarding control variables, GDP per capita, GDP change, population growth, higher education, monetary system and legal system and property rights, as well as dummy (upper middle-income countries=1) were employed to control their influences in the analyses. First, since the level of economic development parallels the extent of technology capabilities, I used GDP per capita (purchasing power parity, PPP), as well as GDP (PPP) per capita squared to capture any curvilinear effects. Second, the changes in GDP from the previous year to the current year, as well as the population growth during the previous year, were used as control variables, since economic expansion can facilitate the dynamics of innovation activities to exploit new markets. These data of GDP and population were taken from World Bank datasets for the period 2005 through 2009. Third, this model was controlled by the counts of tertiary enrolments since a knowledge-creating institution, namely a university, is one of the key players in not only cultivating highly skilled personnel, but also participating in new product and innovation processes (Etzkowitz and Leydesdorff, 2000; Leydesdorff, 2006; Marques et al., 2006). The data were obtained from UNESCO datasets. The time frame was from 2005 through 2009. Fourth, the index for access to sound money was used as a control variable. Since “high

and volatile rates of inflation distort relative prices, alter the fundamental terms of long- term contracts, and make it virtually impossible for individuals and businesses to plan sensibly for the future” (EFW, 2011, p.6), the consistency of monetary policy with long-

term price stability and the ease with which other currencies can be used as alternative currencies are indispensable factors for innovation projects involved in risk, uncertainty and long-term investment. The data were taken from EFW datasets for 2005 and 2009.