Economic Research and Perspectives

Economic Research and Perspectives

The Role of R&D Investment in Iran’s Economy: A Dynamic Input-Output Approach

Document Type : Original Article

Authors
Simin Azizmohamadi 1
Fatemeh Bazzazan 2
1 . PhD Graduate, Department of Economics, Faculty of Social Sciences and Economics, Alzahra University, Tehran, Iran
2 Professor, Department of Economics, Faculty of Social Sciences and Economics, Alzahra University, Tehran, Iran
10.48311/ecor.2025.24052
Abstract
Research and Development (R&D) is a creative endeavor aimed at expanding knowledge to enhance the quantity and quality of production. In today’s innovation-driven economy, R&D investment has become a strategic tool for governments and corporations to stimulate economic growth and development. Accordingly, developed countries and major corporations allocate a substantial portion of their revenue to R&D activities. In contrast, Iran’s investment in R&D has remained below 1% of national income in recent years. Nevertheless, the spillover effects of R&D can help achieve economic objectives with reduced capital expenditure. This study examines the significance of R&D investment in Iran’s economic development, focusing particularly on its impact on the capital required to meet economic targets. The analysis employs a dynamic input–output model, in which capital is endogenous and represented as a matrix detailing inter-sectoral capital exchanges. This capital, in effect, becomes an input for production in the subsequent period and is thus vital for economic forecasting and growth modeling. Assuming that R&D results in either new technologies or improvements to existing ones, two input–output tables—those for the years 1389 (2010/11) and 1395 (2016/17)—are utilized. The former represents the baseline (older) technology, while the latter incorporates R&D advancements, signifying technological progress. The findings demonstrate that R&D investment reduces the fixed capital required to achieve the growth targets set out in Iran’s Sixth Development Plan.
 
Aim and Introduction:
The concept of R&D within economic systems is grounded in endogenous growth theory, initially introduced by Romer (1986) and Lucas (1988), who emphasized the role of human capital accumulation in driving innovation and economic growth.
The Harrod–Domar models, which assume a fixed capital-output ratio and disregard technological change, have historically influenced the integration of input–output models into growth theory. Expanding on these foundations, Leontief (1951) adapted the static input–output model into a dynamic framework to analyze the long-term growth of a multi-sectoral economy.
Los (2001) further extended this field by integrating Schumpeterian elements of endogenous growth into the dynamic input–output model. In this revised model, technological progress is endogenized through R&D expenditure.
In Iran, the impact of R&D investment has been sparsely explored, especially within a dynamic input–output framework, which this research aims to address. While international studies have occasionally employed dynamic input–output models to assess R&D effects, domestic research remains limited.
This study investigates the impact of R&D investment using a modified dynamic input–output model. Specifically, it estimates the level of investment required to achieve the objectives of the Sixth Economic, Social, and Cultural Development Plan, calibrated to the 1395 input–output table. Using a modified version of Pan’s (2006) model, the dynamic input–output coefficients were adjusted to account for R&D investment rates, enabling an evaluation of the capital required to meet sector-specific growth targets.
Data were sourced from the Central Bank of Iran, which provides comprehensive input–output tables for the years 1389 and 1395, along with capital stock figures. The Statistical Center of Iran supplied inventory data for nine sectors: agriculture, oil, mining, industry, water, electricity and gas, construction, transportation, communications, and other services.
 
Methodology:
This research adopts a closed dynamic input–output model to assess the macroeconomic effects of R&D investment. The model posits that R&D alters input and capital coefficients along an S-shaped logistic curve, consistent with the technology life cycle theory. In this formulation, R&D investment and time determine the rate of technological advancement.
By specifying the growth rate, along with the proportion of new production processes (resulting from R&D investment) and the share of legacy processes, the trajectories of technical and capital coefficients can be established. The dynamic input–output framework then illustrates how R&D investment influences the level of capital investment required to meet planned growth objectives.
 
Findings:
To provide a more detailed assessment of the role of R&D investments, two different investment scenarios were examined. The first scenario is derived from the 1395 input–output table, which for the first time designates a specific sector for R&D activities. The second scenario is based on an estimated R&D investment rate equivalent to 2% of total production. In both cases, a notable reduction is observed in the volume of capital investment required to achieve the targeted growth outlined in the Sixth Development Plan. In the first scenario, with an assumed growth rate of 21.5%, a total of 116 billion rials was allocated to R&D units across various sectors between the years 1396 and 1400. This investment resulted in a reduction of 4,574 billion rials in the capital required to achieve the planned growth. In the second scenario, where R&D investment equaled 2% of production and increased at an annual growth rate of 8%, the total volume of R&D investment reached 2,984 billion rials. Consequently, the investment needed to fulfill the objectives of the Sixth Development Plan decreased by 8,671 billion rials. These results demonstrate the considerable efficiency gains achieved through strategic R&D investment.
 
Discussion and Conclusion:
The findings of this study, consistent with previous research emphasizing the economic importance of R&D, highlight the positive and measurable effects of R&D investment on Iran’s economy. By reducing the capital required to achieve targeted growth, R&D investment enhances capital efficiency and accelerates progress toward national development goals. In order to realize these benefits within a shorter time horizon, it is essential to increase the allocation of resources to R&D units. Based on the results, several policy recommendations are proposed: developing targeted strategies to strengthen R&D investment; offering financial grants and incentives to promote R&D activities; evaluating the impact of direct government support on R&D performance across various industries; encouraging investment in emerging and high-potential sectors; and revising existing regulations to foster a more innovation-friendly environment. These measures can help position R&D as a central pillar of Iran’s economic strategy, contributing to sustainable and innovation-driven growth.
Keywords
Capital Coefficients
Dynamic input&‌‌‌‌‌‌ndash
output
Research &‌‌‌‌‌‌‌ Development (R&‌‌‌‌‌‌‌D)
R&‌‌‌‌‌‌‌D investment

Subjects

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