SocioEconomic Challenges (Oct 2024)
The Impact of R&D Investments, Including AI, on Economic Growth and the Country’s Capacity to Improve Its Credit Rating
Abstract
The research and development phase is a crucial initial step in any process leading to innovation, and it aligns with the long-term vision of public and private sector strategies. The research questions in this study are as follows: (1) To determine the resulting interrelationship between R&D investments and GDP using regression analysis; (2) To investigate the amount of economic value added (EVA) that Georgia must create with the increase of R&D investments in a certain period in order to move from the group of countries with a BB sovereign credit rating to the group of countries with a BBB-investment credit rating. World Bank data from 2014-2022 was used. Using regression analysis, the impact of R&D investments (by increasing the share of artificial intelligence in R&D to 30-35%) on the country's GDP was determined. The regression analysis between R&D and GDP generated the following results: (1) the regression coefficient is 7.02502%, indicating that a 10% increase in R&D will result in a 0.70% increase in GDP; (2) the coefficient of determination is 81.1%, which demonstrates that 81.1% of the change in GDP is explained by the change in R&D; (3) the correlation coefficient is 90.1%, indicating a strong positive relationship; (4) the P-value is 0.03492, which suggests that the relationship between these two variables is significant. The calculation of a country's EVA (as a powerful tool that evaluates a country's economic growth and development) incorporates three key factors: the country's total wealth, net operating profit after tax and the Central Bank rate. The EVA model of Georgia was calculated and then analysed in order to determine the additional value that Georgia would need to generate in order to be included in the BBB-investment credit rating group. In order to determine this, the economic indicators of the countries on the BBB scale (Greece, Hungary, India, Kazakhstan) were analysed, and their average weighted index was calculated. This index is characteristically relevant according to the criteria set out by S&P, Fitch, and Moody's. The following economic indicators were considered: nominal GDP, GDP per capita, and real GDP growth. External indicators included: current account balance/GDP, gross external financing needs/CARs plus usable reserves. Fiscal indicators were: general government balance/GDP, debt/GDP, and net debt/GDP. Finally, the consumer prices index growth was considered as a monetary indicator. According to EVA model calculations, in order to achieve Georgia's BBB credit rating in the next 9 years, investments of $61.7 billion are required. Using EVA and other economic indicators in the decision-making process will contribute to a more in-depth analysis of the current economic processes in the country and increase efficiency.
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