Economic Impact of Subsidized Industrial R&D in Israel

The Economic Effects of Subsidized Industry R&D in Israel

The article The Economic Effects of Subsidized Industry R&D in Israel by (Justman and Zuscovitch) explores how the Israeli government has granted contingent subsidies to select businesses, influencing employment, trade deficits, product quality, and overall economic growth. On the basis of data collected between 1987 and 1984, (Justman and Zuscovitch) conclude that subsidies produce technology capital and encourage innovative product creation. This technological capital is dependent on the Law for the Promotion of Research and Development (R&D), which has allowed the government to finance over 50% of authorized projects through grants, resulting in over $31,000 million in sales. increasing employment by 10% and increasing annual returns of 13.4 % annually. In light of the above findings of the article, it is the purpose of this paper to offer an avenue where the conceptual framework, population, data sources, and conclusions of the article are assessed and whether the study correlates to day-to-day affairs of global business in different countries and if the article does offer an avenue where other governments can apply the same subsidy laws towards economic growth.

Conceptual Framework and Data Analysis

To begin with, Justman and Zuscovitch employ the term R&D as an economic activity that is focused towards attaining higher sales locally and internationally whilst ensuring that the employment rate and product quality improve. Being a qualitative aspect of business, the authors offer a model towards calculating the advantages that align to R&D through subsidization by using estimates that allow for the conversion of the qualitative aspect to the quantitative relationship between R&D as technological capital and sales. Further, the use of industry data contribution coefficients allows for the R&D to be analyzed against "sales, employment, trade balance and productivity" (Justman and Zuscovitch 192). As such, by using premises that not only define R&D beyond the project level and acknowledge that its existence in large companies intertwines with other expense overheads but also indicate that R&D is not a flow function of production but is basically a technological capital element, the authors are able to offer a different but very factual conceptualization of R&D at the corporate level. Further, by considering R&D as an enabling factor for the different aspects of the day-to-day operations of the business, the article is able to show that any input in the form of labor, capital, and even production resources can be left stagnant whilst increasing R&D will allow for increased demand for an organization's output. This is evidenced by the conversion of R&D to its contribution to the overall sales that are realized or expected through the technological capital.

Data Sources and Population

As concerns the data sources and population of the study, the authors rely on data provided by the Office of the Chief Scientist, Ministry of Trade and Industry (OCS) which is the mandated agency that the Israel government uses to provide R&D grants. This data can thus be relied on for its accuracy and reliability is expected to be a true reflection of what has been budgeted against actual subsidies that the government paid and the royalties that it received between the aforementioned years. To this end, the data classification and the use of questionnaires to random firms within the database not only acts as a secondary source but further validates the accuracy of the data that the OCS has in its records and as such, the sample size of 180 firms is adequate towards the provision of a report that is reliable as concerns the positive impact of R&D on sales. As such, by analyzing the data, the findings by Justman and Zuscovitch that R&D should be considered as technological capital is evident in that the involvement of the Israel government towards the provision of R&D subsidies to different firms has allowed for increased sales at different levels for the different sectors that the subsidies are granted to. It is imperative to point out that the highest levels of increased sales are noted in electronics and communications sector whilst the lowest is in programming and software (Justman and Zuscovitch 195). Further, there is evidence that increase in R&D grants leads to increased domestic value addition as concerns employment that grows by more than 10% and trade balance of over $23,000 million that have lead to increased gross domestic product (GDP) of 0.45% against 0.3% productivity gains in Israel's economy (Justman and Zuscovitch 197).


The study does offer an avenue of understanding how governments can use monetarized laws to not only increase economic growth but also ensure that its employment rate shifts towards a balance to the ever-changing population. Further, by being involved in the day-to-day operations of firms that operate within its borders by investing in their R&D, a government can be able to not only economically empower its citizens through increased employment but also impact on the sales and quality of products of the firms it offers R&D assistance to. This aligns to increasing the productivity of microelements of its economy towards increased GDP and trade balance.

Work Cited

Justman, Moshe and Ehud Zuscovitch. "The Economic Impact of Subsidized Industrial R&D in Israel." R&D Management (2002): 191-199. Document.

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