Working papers published by the United Nations University - Maastricht Economic and social Research and training centre on Innovation and Technology http://www.merit.unu.edu/publications/wp.php UNU-MERIT 2009 by T. Ziesemer - We provide a growth model with imported resources and foreign debt accumulation providing the basis for two questions and regression equations. 1) Under what conditions do growth rates of per capita income remain positive if imported inputs such as oil have increasing real prices? 2) Is accumulation of foreign debt driven by a current account deficit of which two percent of the GDP stem from oil imports, sustainable? For both questions we provide estimates for the USA with the following results. Oil price growth rates have only a marginal impact on those of GDP per capita as long as they exceed inflation rates by not much more than they did in the past. The US foreign debt/GDP ratio follows an unstable difference equation and therefore is not sustainable. We briefly discuss possible future stabilization through the market and through policies. JEL−code: F21, O41, Q01. Keywords: capital movements, growth, sustainability. UNU−MERIT Working Papers ISSN 1871−9872 http://www.merit.unu.edu/publications/wp.php?year_id=2009#wp2009-028 by T. Lommelen, F. den Hertog, L. Beck & R. Sluismans - This paper reflects upon the way that we balanced design and development in three specific case projects in order to contribute to creating and accumulating knowledge that is both relevant to practitioners and academics. More specifically, it is shown how learning within one project was used to improve the design of the next project. The three projects were set up in the context of government−sponsored social science programs and aimed at improving innovation in SMEs. As the paper shows, looking at these three projects shows the contribution from seeing design and development as two sides of the same coin. Keywords design−oriented research, organizational development, large−scale projects (JEL M10) UNU−MERIT Working Papers ISSN 1871−9872 http://www.merit.unu.edu/publications/wp.php?year_id=2009#wp2009-027 by T. Ziesemer - The credit crisis of OECD countries has a negative impact on the growth of the world economy according to a simple error correction model. This causes negative growth effects in poor developing countries. The reduced growth has a direct or indirect impact on the convergence issue, aid, remittances, labour force growth, investment and savings, net foreign debt, migration, tax revenues, public expenditure on education and literacy. We estimate dynamic equations of all these variables using dynamic panel data methods for a panel of countries with per capita income below $1200 (2000). The estimated equations are then integrated to a dynamic system of fourteen equations for fourteen variables that allows for highly non−linear baseline simulations for these open economies. Then we analyze the effects of shocks as predicted by the international organizations for the OECD and world growth for 2008 and 2009. Whereas growth rates return to the baseline scenario very quickly, the GDP per capita returns to its baseline level in OECD countries and the world economy after some years but in poor developing countries it remains below the baseline scenario for more than 200 years. This long run blow to convergence leads to more remittances and emigration, a lower labour force growth, higher shares of GDP for saving, tax revenues, public expenditure on education and investment, and higher literacy. However, all these stabilizing forces through remittances and emigration cannot compensate the losses in levels of growth. Short and medium run effects are driven by a return to baseline for OECD and world GDP growth rates by the end of 2010, but for levels only 10 to 30 years later. Therefore we first get 15 to 20 years of fewer remittances, tax revenues, savings, public expenditure on education, literacy, and investment, more emigration and lower labour force growth. JEL class.: F22, 24; G01, O15, J61. Keywords: crisis, migration, remittances, accumulation, growth. UNU−MERIT Working Papers ISSN 1871−9872 http://www.merit.unu.edu/publications/wp.php?year_id=2009#wp2009-026 by M. Iizuka & Y. Borbon−Galvez - There are two assumptions regarding regulatory instruments under the globalizing economy. These are: (1) increasing role of private standards in shaping the economic activities of developing countries; and (2) diminishing role of national institutions in “open” and “liberal” markets. In other words it was considered that global private standards would eventually replace already weak or absent national and local institutions in developing countries. The purpose of our paper is to suggest an alternative interpretation to this widely held view about national regulations and institutions in developing countries under the ‘new standard regime’ in the food and agricultural sector where the regulatory framework is traditionally stronger at national level. The role of national regulatory institutions is considered to diminish as the countries compete in the “open” and “liberal” global market since firms are obliged to comply with global private standards. Instead, we have observed cases in developing countries which demonstrate an opposite phenomenon. In these cases, the local and national institutional capacity had actually being enhanced through learning in the “open” and “liberal” market at global level. In other words, we discovered that while the global (private) standards intend to control and shape the economic activities in developing countries through value chains, the local institutions also were transformed in a co−evolutionary manner to sustain the viability of existing local economic activities. This paper hence tries to illustrate our argument with cases from developing countries to demonstrate how the process of adapting to survive in the ‘new regime’—compliance to global (private) standards—may have positive impacts on national and local institutions. Moreover, we intend to highlight some common features of transitions which are taking place in regulatory frameworks within the context of a global ‘new standards regime’ (public−private regulations). We will discuss the following cases of standards compliance and their impacts on enhancement of national and local capabilities: (1) the salmon farming industry in Chile, (2) and the fresh agricultural products in Mexico. These cases illustrate the complex interactions between global standards (both private and public−private) and national and local institutions. As the cases are slightly different, the comparison brings about interesting dimensions in illustrating institutional capacity building ‘trajectories’ from both private and non−private standards. Keywords: Standards, Role of National Institutions, Capacity Building, Latin America, Agri−food JEL code: L5, O25 UNU−MERIT Working Papers ISSN 1871−9872 http://www.merit.unu.edu/publications/wp.php?year_id=2009#wp2009-025 by B. Mirza & R. Kemp - The paper tries to explore the rationale behind the complexities of energy poverty among different income groups in rural communities. We attempted to understand why rural rich, despite their relatively high purchasing power use energy sources which tend to categorize them as energy poor. Using Energy Poverty Survey (EPS) – a dataset of more than 600 rural households from 27 different rural communities of Punjab, Pakistan, we presented energy access situation in rural households among different income groups. Subsequently, we used logit to assess access factors which could impact the energy source choices among different income groups. The insignificance of household income for traditional biomass use and high significance of community remoteness indicators imply that households give high importance on the proximity of energy sources available to them and, in many cases, will prefer to be in the state of energy poor, than to use modern energy source like LPG. Keywords: energy poverty, rural rich and poor, rural communities, Punjab, Pakistan, fuelwood, animal waste, plant waste, kerosene, liquid petroleum gas JEL: Q01, Q42, I32 UNU−MERIT Working Papers ISSN 1871−9872 http://www.merit.unu.edu/publications/wp.php?year_id=2009#wp2009-024 by R. Narula & J. Dunning - This paper revisits an earlier contribution (Narula and Dunning 2000) and considers how economic globalisation has changed the nature of the MNE, MNE motivations, the MNE subsidiary and the modalities by which they interact with domestic economic actors. Most developing countries, however, have responded reactively. We discuss how the opportunities and challenges for developing countries in following an MNE−assisted development strategy have changed over the last decade. The growing share of industrial activity owned and controlled by MNEs does not always result in a proportional increase in development effects, because individual MNE establishments have different potential for externalities. Concatenation is important: when stage−inappropriate MNE activities are established, crowding−out or regulatory capture is a likely outcome. We highlight the need for systematically linking MNE and industrial policies, but differently than in the import−substitution era. Attracting the ‘rights kind’ of MNE activity remains important, but the greater heterogeneity requires more customisation of policy tools. Lastly, we warn of the dangers of underestimating the social and political costs of structural adjustment and rapid institutional change associated with globalization. keywords: FDI, spillovers, industrial policy, governments, development, WTO, globalisation, developing countries, liberalisation. JEL: F23, O14, O19 UNU−MERIT Working Papers ISSN 1871−9872 http://www.merit.unu.edu/publications/wp.php?year_id=2009#wp2009-023 by J. Baum, R. Cowan & N. Jonard - Empirical research on strategic alliances has focused on the idea that alliance partners are selected on the basis of social capital considerations. In this paper we emphasize instead the role of complementary knowledge stocks (broadly defined) in partner selection, arguing not only that knowledge complementarity should not be overlooked, but that is may be the true causal force behind alliance formation. To marshal evidence on this point, we design a simple model of partner selection in which firms ally for the purpose if learning and innovating, and in doing so create an industry network. We abstract completely from network−based structural and strategic motives for partner selection and focus instead on the idea that firms' knowledge bases must "fit" in order for joint learning and innovation to be possible, and thus for an alliance to be feasible. The striking result is what while containing no social capital considerations, the simple model replicates the firm conduct, network structure, and contingent effects of network position on performance observed and discussed in the empirical literature. Keywords: Network formation and dynamics; Innovation; Knowledge; Alliances JEL: D8, D2, L14, L2, O3 UNU−MERIT Working Papers ISSN 1871−9872 http://www.merit.unu.edu/publications/wp.php?year_id=2009#wp2009-022 by S. Filippov & K. Kalotay - This paper examines the potential impact of the economic crisis – started in 2008 – on the dynamics global foreign direct investment, especially in the new member states of the European Union. The global economic crisis that hit the world in 2008 has forced scholars and policy makers alike to rethink their approaches to the global economy, in particular to financial markets (including stock exchanges and portfolio investment). It can be hypothesised that the crisis has been particularly devastating because it has resulted from the coincidence of three factors: a cyclical downturn in the world economy; a structural change that hit certain industries which used to be star performers in the global economy (especially the automotive industry); and the collapse of the previous model of the financial industry based on excesses. This paper asks how this crisis affects foreign direct investment flows, with special attention being paid to the question of which locations are set to lose the least and which ones are set to lose the most. In this respect, particular attention is paid to the activities of subsidiaries of multinational enterprises. These subsidiaries can follow different scenarios as a response to the global economic turmoil, including a reorganization of their production systems, and a reduction or closure of activities that are deemed to be less necessary for the continuation of activities. Finally, the paper examines the policy implications of the crisis. It challenges the view that rising economic nationalism (in the form of protecting one location against locations in other countries) would be the right answer to the problems created by corporate restructurings. Keywords: foreign direct investment, credit crunch, foreign subsidiaries, Europe JEL: F01, F23, O30 UNU−MERIT Working Papers ISSN 1871−9872 http://www.merit.unu.edu/publications/wp.php?year_id=2009#wp2009-021 by T. Ziesemer - The sign of worker remittances in growth regressions is heavily disputed in the literature. Comparing two growth regressions with different signs for the remittance variable we show that collinearity with the lagged dependent variable might indicate that collinearity should be investigated comprehensively and might lead to a change in specifications which differ in the variance inflation factors (VIF). In our case the variance inflation factor for remittances depends on the use of a five or one−year lag of the lagged dependent. In the regression with a VIF below ten, the standard critical value, the sign of remittances is positive. Keywords: Growth, remittances. JEL−code: F24, O11,15,40. UNU−MERIT Working Papers ISSN 1871−9872 http://www.merit.unu.edu/publications/wp.php?year_id=2009#wp2009-020 by L. Klerkx, A. Hall & C. Leeuwis - This paper examines the role of innovation brokers in stimulating innovation system interaction and innovation capacity building, and illustrates this by taking the case of Dutch agriculture as an example. Subsequently, it reflects upon the potential role of innovation brokers in developing countries’ agriculture. It concludes that innovation brokerage roles are likely to become relevant in emerging economies and that public or donor investment in innovation brokerage may be needed to overcome inherent tensions regarding the neutrality and funding of such players in the innovation system. The Dutch experience suggests that innovation brokers need to be contextually embedded, and are unlikely to become effective through a centrally−imposed design. Hence, we conclude that stimulating their emergence requires a policy that supports institutional learning and experimentation. In the evaluation of such experiments, it is important to note that innovation brokers tend to play intangible roles that are not easily captured through conventional indicators. Key Words: Agriculture, Developing Countries, the Netherlands, Innovation Broker, Neutrality, Institutional Learning, Context−Specific, Innovation Systems, Capacity Strengthening, Agricultural Extension Journal Codes: N54, 013, 031, Q13, Q16, Q18 UNU−MERIT Working Papers ISSN 1871−9872 http://www.merit.unu.edu/publications/wp.php?year_id=2009#wp2009-019 by Z. Babutsidze - This paper presents the computational model of consumer behaviour. We consider two sources of product specic consumer skill acquisition, termed here as learning how to consume: learning by consuming and consumer socialization. Consumers utilize these two sources in order to derive higher valuations for products they are consuming. In this framework we discuss the behavior of returns to product promotion relative to the changes in product characteristics, such as quality and userfriendliness, as well as in case of varying intensity of consumer socialization. The main finding is that in case of duopoly the dependence of returns to advertising on product quality is not monotonic as it has been claimed by earlier studies. Additional important finding indicating the importance of the models with interacting agents is that returns to advertising exhibit qualitatively different behavior in case of zero intensity of consumer socialization. Key Words: Consumer skills, learning by consuming, consumer socialization, product promotion, returns to advertising. JEL codes: D11, M37, C63. UNU−MERIT Working Papers ISSN 1871−9872 http://www.merit.unu.edu/publications/wp.php?year_id=2009#wp2009-018 by A. Arundel & R. Kemp - In this paper we offer a discussion of eco−innovation and methods for measuring it. Eco−innovation is a new concept of great importance to business and policy makers, covering many innovations of environmental benefit. Past research and measurement activity primarily focused on pollution control and abatement activities or on the environmental goods and services sector. We argue that eco−innovation research and data collection should not be limited to such environmentally motivated innovations, but should encompass all products, processes, or organizational innovations with environmental benefits. Attention should be broadened to include innovation in or oriented towards resource use, energy efficiency, greenhouse gas reduction, waste minimization, reuse and recycling, new materials (for example nanotechnology−based) and eco−design. Research should cover the drivers, patterns, and benefits of eco−innovation for each of these applications, since these factors are likely to differ. For measuring eco−innovation, no single method or indicator is likely to be sufficient. In general, one should therefore apply different methods for analyzing eco−innovation – to see the “whole elephant” instead of just a part. More effort should be devoted towards direct measurement of eco−innovation outputs using documentary and digital sources to complement the current emphasis on innovation inputs such as R&D or patents. Innovation can also be measured indirectly from changes in resource efficiency and productivity. These two avenues are underexplored and should be given more attention in order to augment our rather narrow knowledge basis. Keywords: eco−innovation, measurement, indicators, data needs. JEL codes O1 en O3 UNU−MERIT Working Papers ISSN 1871−9872 http://www.merit.unu.edu/publications/wp.php?year_id=2009#wp2009-017 by T. Azomahou & T. Mishra - We consider a stochastic environment to study interactions among pollution growth, demographic changes, and economic growth. Drawing on the empirical findings of slow convergence patterns of pollution shocks (viz., with a long−memory), we build an analytical framework where stochastic environmental feedback effects on population changes are reflected upon aggregate economic growth. Long−memory in economic growth, in our model, is shown to arise due to the inherent stochasticity in environmental and demographic system. Empirical results for a set of developed and developing countries generally support our conjecture. Simulation experiment is carried out to lend additional support to this claim. JEL Classification codes: C13, J11, O47 Key words: Environmental quality, long−memory, demographic dynamics, economic growth UNU−MERIT Working Papers ISSN 1871−9872 http://www.merit.unu.edu/publications/wp.php?year_id=2009#wp2009-016 by A. Doranova, I. Costa & G. Duysters - The Clean Development Mechanism (CDM) is one of the three greenhouse gas emission reduction and trading instruments of the Kyoto Protocol (KP). The CDM allows governments and business entities from developed countries to offset their emissions liabilities by reducing or avoiding emissions in developing countries, where it is often cheaper to do so. Examples of CDM projects include the installation of various renewable energy producing facilities, cutting the GHG emissions in industry and waste management, or projects focused on improving energy efficiency. From the sustainable development perspectives CDM has been alleged as a new channel of transfer and diffusion of climate friendly technologies (CFT) in developing countries. However we are evidencing that the majority of the CDM projects deploy local sources of technology, which challenges the North− South technology transfer paradigm established under the sustainable development agenda of the KP. This paper is an attempt to explain technology sourcing patterns in CDM projects through employment of knowledge base determinants. On the basis of an empirical analysis we conclude that in countries with a stronger knowledge base in CFT, CDM project implementers tend to go for local and combined technologies and less for foreign technologies. Key words: Clean Development Mechanism, Kyoto Protocol, Technology JEL Classification: Q0, Q2, Q4, O3, O33, O38 UNU−MERIT Working Papers ISSN 1871−9872 http://www.merit.unu.edu/publications/wp.php?year_id=2009#wp2009-015 by P. Mohnen & B. Lokshin - While in 1996, 12 OECD countries offered R&D tax incentives, in 2008 this number increased to 21. Most countries have opted for level−based instead of incremental R&D tax incentives. This paper takes a critical look at how the effectiveness of R&D tax incentives has been assessed in recent evaluations. Whether based on structural models estimating a price elasticity of R&D or on treatment evaluation methods, most studies estimate the cost effectiveness ratio or additionality. If the cost effectiveness ratio is greater than 1, or firms to more R&D than before, the policy is considered to be effective. A more proper net welfare evaluation of this policy should also include administration, compliance and transfer costs, the marginal burden of taxation, as well R&D externalities and the indirect effects on innovation and productivity. The net welfare gain is shown to be sensitive to a certain number of parameters that are not always estimated with great precision. In particular, the transfer cost or deadweight loss associated with level−based tax incentives is shown to depend on the size of the firm, or more precisely its ex−ante R&D level. We report on the success of a past policy changes in the Netherlands and simulate the effect of various parameter changes in the existing Dutch R&D tax incentive scheme. We show that introducing marginal changes in the schemes’s parameters has little impact of increased R&D spending. The policy is more effective for small firms than for large firms. We end with a discussion of the pros and cons of level−based versus incremental R&D tax incentives. UNU−MERIT Working Papers ISSN 1871−9872 http://www.merit.unu.edu/publications/wp.php?year_id=2009#wp2009-014 by A. Garcia & H. Hollanders - This paper tries to quantify the effect of diffusion of informal knowledge on the innovative performance of European firms using data derived from the 3rd Community Innovation Survey. When firms are asked whether or not they have introduced new products or processes, they were also asked to which degree such innovations were developed in−house. These degrees were captured by the CIS variables InPdtW and InPcsW. These variables ranged from 1 (Mainly done by the firm) to 3 (Mainly done by other enterprises). The focus of this paper is to investigate the impact of diffusion of informal knowledge. We combine the previous variables with another variable which reflects firms that were not doing any formal collaboration with other institutions. If an innovative firm has no formal collaboration arrangements and the innovation has not been done mainly by the firm, then diffusion of informal knowledge is considered to be the main driver of the innovation. The idea is that informal channels are accessible to all firms. This paper tries to quantify the impact of such flows of knowledge on firms’ innovation performance. To do this, a two step procedure is followed: −In a first step, a latent variable for diffusion of informal knowledge is defined and estimated based on firms’ characteristics. −In a second step, the latent diffusion variable is introduced as a regressor in a probit/tobit model. Keywords: Knowledge flows, innovation, dynamic equations, sectoral innovation, CIS. JEL: C34, O32, O31 UNU−MERIT Working Papers ISSN 1871−9872 http://www.merit.unu.edu/publications/wp.php?year_id=2009#wp2009-013 by A. Garcia - Growth theory has mainly focused on process innovation, either through an increase in quality of the product or a reduction on the cost. The main contributions in growth theory that includes product innovation has been done in the Dixit and Stiglitz framework. This framework works with oversimplifying restrictions on the demand side: Preferences of consumers are assumed to be constant and equal for all goods. This paper introduces vertical and horizontal differentiation in final goods. Goods are different in their habit formation parameters. Innovation is not the normal reduction in costs but an increase in the capacity to satisfy consumers’ needs. Growth in this model is defined as the growth of the final value added. JEL: O4, E21, D11, O31, M37. Keywords: growth, product innovation, technical change, consumption. UNU−MERIT Working Papers ISSN 1871−9872 http://www.merit.unu.edu/publications/wp.php?year_id=2009#wp2009-012 by I. Bodas Freitas & B. Verspagen - This paper aims at analysing the impact of institutional and organizational factors on bridging industrial and university motivations for collaboration, as well as on the content, management and outcome of this relationship, in the Netherlands. In particular, we explore which type of projects, set up under specific industrial and university motivations, are more likely to face institutional barriers related to technology, market and organisational incentives frameworks. Moreover, we analyse the impact of technology transfer offices, research sponsoring, part−time professorships, and patenting on aligning university and industry motivations towards collaboration. To proceed empirically, thirty in−depth cases of successful university−industry knowledge transfer are analysed. Keywords: university−industry interaction, innovation cooperation. JEL codes: O31, O32. UNU−MERIT Working Papers ISSN 1871−9872 http://www.merit.unu.edu/publications/wp.php?year_id=2009#wp2009-011 by A. Szirmai - This paper examines the emergence of manufacturing in developing countries in the period 1950−2005. It presents new data on structural change in a sample of 63 developing countries and 16 advanced economies. Industrialisation is seen as a single global process of structural change, in which separate countries follow different paths depending on their initial conditions and moment of their entry into the industrial race. With a few important exceptions such as Mexico, Brazil, India and China, developing countries embarked on industrialisation after 1945. The paper argues that successful catch up in developing countries is associated with industrialisation. It examines the theoretical and empirical for the thesis that industrialisation acts as an engine of growth and attempts to quantify different aspects of this debate. The statistical evidence is not straightforward. Manufacturing has been important for growth in developing countries, but not all expectations of the engine of growth hypothesis are borne out by the data. The more general historical evidence provides more support for the industrialisation thesis. Keywords: Structural Change, Manufacturing, Engine of Growth, Catch Up JEL CODES: O14, Industrialisation, Manufacturing and Service Industries; N6, Manufacturing and Construction UNU−MERIT Working Papers ISSN 1871−9872 http://www.merit.unu.edu/publications/wp.php?year_id=2009#wp2009-010 by M. Steglich, E. Keskin, A. Hall & J. Dijkman - Agrifood stakeholders across the world are under ever−increasing pressure with globalization and new market demands — together with changing quality and safety requirements. The ability to respond to new challenges and opportunities is important not just for producers but also for industries in developing countries. This paper explores the horticulture sector of Kenya in order to gain a better understanding of what has most significantly contributed to its success in terms of innovation response capacity. This paper aims to present what “innovation response capacity” entails, especially for natural resource−based industries in a developing country context. It will also provide an analytical framework that draws elements from agricultural innovation capacity and the innovation systems framework. This is provided through case study research conducted in Kenya by exploring a prominent horticultural enterprise, Homegrown Ltd. The paper concludes that an important element of success in this case was the formation of a range of linkages that enabled a systemic sector response to challenges rather than isolated action of individual players. Key Words: Innovation Response Capacity, Kenya, Horticulture, Globalization, Smallholder Production, Policy Journal Codes: N57, 013, 031, Q13 UNU−MERIT Working Papers ISSN 1871−9872 http://www.merit.unu.edu/publications/wp.php?year_id=2009#wp2009-009 by I. Costa & A. Marin - This paper investigates FDI−related spillovers in Brazil for the period 1996−2005. In contrast to most previous recent studies, which have failed to identify any significant effects in emerging economies, we found that horizontal spillovers did arise in Brazil. However, they did not arise simply as a consequence of general FDI−mediated technology transfer from MNC headquarters, as the standard approach presumes. Nor were they associated with expected inter−industry differences in technological intensity, or with differences in domestic firms’ absorptive capability. Instead, spillovers were associated with the existence of particular kinds of localized knowledge−creation activities undertaken by subsidiaries. We discuss the theory and policy implications that emerge from these results. Keywords: FDI spillovers; subsidiaries; heterogeneity; localized innovation; Brazil; productivity. JEL codes: O3, O4, O1 UNU−MERIT Working Papers ISSN 1871−9872 http://www.merit.unu.edu/publications/wp.php?year_id=2009#wp2009-008 by T. Ziesemer - In regressions for net immigration flows of developing countries we show that (i) savings finance emigration and worker remittances serve to make staying rather than migrating possible until a certain value, beyond which the opposite holds; (ii) lagged dependent migration flows have a negative sign even in the presence of migration stock variables; (iii) migration stocks have S−shaped effects: at sufficiently low values higher migration stocks support emigration; beyond a threshold value they support net immigration before they possibly support emigration again after a second threshold value. JEL−code: F22, O15. Keywords: migration, remittances. UNU−MERIT Working Papers ISSN 1871−9872 http://www.merit.unu.edu/publications/wp.php?year_id=2009#wp2009-007 by T. Azomahou, B. Diene & L. Soete - We study the behavior of consumption and health investment resulting from shocks undermining health capital accumulation. We examine the effects on subsequent life cycle of long−lived shocks undermining health with either an acceleration of health capital deterioration, or a decrease in health investment efficiency. We also address the issue of the financing of health investment. We provide new evidence based on nonparametric estimations which show complex non−linear interplay between life expectancy and health expenditure. We then develop a benchmark model where consumption and health capital enter additively in the utility function, featuring independence between the returns from ordinary consumption and health. Then, we depart from this setup by assuming non−additive preferences meaning that ordinary consumption also is crucial for health. We show that a shock undermining health which increases health expenditures and weakens the income base, not only affects savings but also compromises the consumption capacity, the human and physical capital of the economy, and undercuts the process of economic development. We also show that the magnitude of the effects strongly depends on the assumed preferences. JEL classiffcation: E21; I12; O10 Keywords: Ordinary consumption; health investment; saving; non−parametric estimation UNU−MERIT Working Papers ISSN 1871−9872 http://www.merit.unu.edu/publications/wp.php?year_id=2009#wp2009-006 by A. Garcia - Evolution of consumers' preferences has been recognized by many scholars as being key to understanding technological change. However, mainstream economics cannot account for the seemingly irrational behavior of consumers based on changes in taste – consumer theory lacks exibility and accuracy to explain changes in consumer behavior. Adopting a behavioral psychology perspective, this paper argues that there is a rational pattern in the change of consumers' tastes. I argue that behavioral psychology offers us a unique perspective to solve some of the paradoxes of consumer behavior. This paper incorporates exibility into CES utility function to more adequately account for, and differentiate between, habit formation routines. A model is developed in which habit formation and consumption of new goods are interrelated. UNU−MERIT Working Papers ISSN 1871−9872 http://www.merit.unu.edu/publications/wp.php?year_id=2009#wp2009-005 by M. Iizuka - Conventionally, standards are considered as a governance tool in the production system in a one−directional and hierarchical relationship between foreign trans−national corporations (TNCs) or global buyers on one hand and subsidiaries and producers on the other. They were considered as transmitting necessary specifications of goods – codified knowledge – to the producers. Despite the fact that this process begins with a one−way power relationship and associated flow of knowledge and standards, such one−way flows may become consolidated into two−way interlinkages when power balances themselves reverse with the development of collective capability in catching−up countries. In such a context, standards increasingly act as a catalyst for creating collective interfaces where diverse knowledge from horizontal and vertical relationships – local and global, tacit and codified, and buyer and producer – intercept and converge to promote interactions and learning for those involved. The Chilean salmon farming industry is examined to understand how standards compliance enhanced collective capability. Key words: Standards, Capability, Governance, Catching up JEL code: L15, L 66 O 13 UNU−MERIT Working Papers ISSN 1871−9872 http://www.merit.unu.edu/publications/wp.php?year_id=2009#wp2009-004 by R. Perrot - This paper looks at the role of firms in the transformation of fossil fuel based energy systems towards cleaner and greener energy systems. Firms are playing an important role in determining the speed and direction of technical change towards such energy systems. But systemic constraints and negative externalities tend to make such transformations constraint and difficult. To be able to understand how firms overcome these systemic constraints and bring about positive externalities it would be important to observe the strategic role played by firms. Firms are removing technological and economic constraints by engaging in strategic alliances with other firms and research organizations. Both small and large firms have positioned themselves strategically in the green energy market either through basic innovations or through innovations brought about by joint technological partnerships. JEL: A10, M21, 039 Keywords: Firm Strategy, Sustainable Energy, Renewable Energy, System Transition UNU−MERIT Working Papers ISSN 1871−9872 http://www.merit.unu.edu/publications/wp.php?year_id=2009#wp2009-003 by S. Akçomak - There has been a recent surge of interest in social economics and social capital. Articles on social capital that are published in the last five years constitute more than 60 percent of all articles on social capital. Research on social capital is now massive and spans sociology, economics, management, political science and health sciences. Despite this interest there is still not a consensus on the definition and the measurement of social capital. This paper argues that this is due to lack of interaction between disciplines. The social capital of social capital researchers is low between disciplines. Different from other theories of capital, social capital theory has concurrently been developed by various disciplines and as such, advancements in social capital research could only be achieved by conducting crossdisciplinary research. Key words: Capital, social capital, co−authorship network JEL codes: A13, Z1 UNU−MERIT Working Papers ISSN 1871−9872 http://www.merit.unu.edu/publications/wp.php?year_id=2009#wp2009-002 by R. Baghana & P. Mohnen - In this paper we evaluate the effectiveness of R&D tax incentives in Quebec, using manufacturing firm data from 1997 to 2003 originating from R&D surveys, annual surveys of manufactures and administrative data. The estimated price elasticity of R&D is −0.10 in the short run and −0.14 in the long run, with a slightly higher elasticities for small firms than for large firms. We show that there is a deadweight loss associated with level−based R&D tax incentives that is particularly acute for large firms. For small firms it is not sizeable enough to suppress the R&D additionality, at least not during quite a number of years after the initial tax change. Incremental R&D tax credits do not suffer from this deadweight loss and are from that perspective preferable to level−based tax incentives. Keywords: R&D tax credits, Quebec, price elasticity of R&D JEL codes: O32, O38, H25, H50, C23 UNU−MERIT Working Papers ISSN 1871−9872 http://www.merit.unu.edu/publications/wp.php?year_id=2009#wp2009-001