Academic journal article The Journal of Developing Areas

Estimating the Impact of R&d Spending on Total Factor Productivity for Oecd Countries: Pooled Mean Group Approach

Academic journal article The Journal of Developing Areas

Estimating the Impact of R&d Spending on Total Factor Productivity for Oecd Countries: Pooled Mean Group Approach

Article excerpt

(ProQuest: ... denotes formulae omitted.)


The last few decades have shown that research and development (R&D) investment is considered a key factor in the economic growth of various countries. Particularly, with endogenous growth models, economists around the world are able to unearth the relationship between R&D, productivity, and growth. Many empirical studies have confirmed that improvements to a nation's standard of living and socio-economic development are due to the innovation that results from R&D. As countries spend more on R&D, they develop more sophisticated technological products, which increase real wages and living standards. However, the returns from R&D activities are mostly intangible in the form of new knowledge leading to competitive advantages, as the primary goal of R&D activities is to improve existing products or develop new ones. Studies on the effects of R&D have crucial implications for policy makers and company managers. If they are convinced about the returns on R&D investments, they are likely to spend more. Otherwise, it would not make sense to spend on R&D at the forgone cost of alternative investments options (Bravo-Ortega and Marin, 2011).

In this paper, we examine the relationship between total factor productivity, information and communication technology capital services, R&D expenditures, and a set of auxiliary variables (labor quantity, labor quality, non-ICT capital services) by employing a panel data methodology to a set of OECD countries. The objective is to show if and to what extent TFP is sensitive to ICT and R&D over both long- and shortterms by controlling for auxiliary determinants. The paper is designed as follows. We first review the theoretical discussions regarding the role of R&D in economic growth in general and TFP in particular. Second, we present the existing empirical evidence in the literature regarding the impact of R&D on economic growth. Third, we outline our research methodology. Fourth, we discuss the empirical findings and their implications. Finally, we conclude with learned lessons for the nations with low R&D spending.


Exogenous economic theories have not paid great attention to R&D. According to Solow model, sustained technological progress is essential to generating economic growth (Inekwe, 2014). However, the Solow model is based on the production function of capital and labor, whereas technological progress is exogenous. Economies can converge to a steady state with zero growth rate of output per capita. The growth accounting model treats technologic progress as a residual after accounting for the contributions of labor and capital. Recent interest in identifying the factors responsible for differences in income across countries is largely driven by new endogenous growth models which explore the role of technology as endogenous variable behind economic growth. Technical progress through R&D is increasingly viewed in these theories as a major contributor to the growth of business and the macro economy.

Ever since the endogenous growth models were developed, R&D has become a key research topic. Schultz (1953), Solow (1956), and Griliches (1958) were the first to reveal empirical evidence showing the importance of R&D for productivity and sustainable economic growth. Since then, many researchers have done remarkable theoretical and empirical works on the same subject. Those studies have explored the contribution of R&D spending from both macro and microeconomic perspectives. The macroeconomic models examine the relationship between R&D and economic growth through the econometric impact of R&D spending on TFP. On the other hand, microeconomic models explore the relationship between R&D and productivity at firm levels. Below, we want to provide a brief overview of several of such studies. …

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