The shift to a knowledge-based economy has been accelerating, boosted by
rapid technical development particularly in IT and telecommunications since the
1990s. In a knowledge-based economy, the accumulation of technology capital
through R&D is considered to be the source of sustainable growth, and Korea is
also witnessing the continuous growth of R&D expenditures and a gradual increase
of its share in GDP. Given the growing importance of R&D expenditure in the
national economy, we use panel data on the domestic manufacturing industry to
empirically analyze its effects on productivity, real investment and employment,
with a particular focus on manufacturing.

 The analysis shows that the R&D expenditure of domestic manufacturing
industry has contributed to improving labor productivity and positively affected
corporate real investment after some time lag. Increased R&D expenditure may
lead to a decline in real investment in the short term due to its constraint of
available budget resources, but it acts to expand real investment in the long term
by creating new areas for investment through improvement in productivity and the
development of new products. These results imply that expanding R&D
expenditure may have a positive effect to some degree in easing the recent
slowdown in the growth in labor productivity and the sluggishness of real
investment in the Korean economy. Meanwhile, the direction of the effects of
R&D expenditure on employment is seen as being somewhat unclear, which
appears attributable to the combination of two entirely different influences on
employment, as the technological innovation arising from R&D expenditure has
characteristics of both product innovation (which increases production factors
inputs) and process innovation (which may cause demand for labor to decline).

 In order that R&D expenditure can help boost real investment and employment
and consequently heighten dynamism in every sphere of the economy, policy
support should be strengthened so as to envigorate R&D expenditure in a
balanced way in various sectors including the services industry with its relatively
low productivity. In particular, product innovation-related R&D should be given
greater support, so that it can act positively to heighten productivity and expand
employment by creating new market spheres.