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How Robust is the R&D – Productivity relationship? Evidence from OECD Countries

How Robust is the R&D – Productivity relationship? Evidence from OECD Countries

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WIPO Economic Research Working Paper No. 1
We examine the robustness of R&D and productivity relationship in a panel of 16 OECD countries. We
control for fifteen productivity determinants predicted by different theoretical models. Following the advances
in non-stationary panel data econometrics, we estimate four variants of thirteen specifications. All models
appear co-integrated. Results are rigorously scrutinized through extensive bootstrap simulations and
sensitivity checks. R&D and human capital emerge robust in all specifications making them universal drivers
of productivity across nations. Most other determinants are also significant. Productivity relationships are
heterogonous across countries depending on their accumulated stocks of knowledge and human capital.
WIPO Economic Research Working Paper No. 1
We examine the robustness of R&D and productivity relationship in a panel of 16 OECD countries. We
control for fifteen productivity determinants predicted by different theoretical models. Following the advances
in non-stationary panel data econometrics, we estimate four variants of thirteen specifications. All models
appear co-integrated. Results are rigorously scrutinized through extensive bootstrap simulations and
sensitivity checks. R&D and human capital emerge robust in all specifications making them universal drivers
of productivity across nations. Most other determinants are also significant. Productivity relationships are
heterogonous across countries depending on their accumulated stocks of knowledge and human capital.

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HOW ROBUST IS THE R&D –PRODUCTIVITY RELATIONSHIP?EVIDENCE FROM OECD COUNTRIES
Mosahid KhanKul B LuintelKonstantinos Theodoridis
Working Paper No. 1
December 2010
WIPO ECONOMIC RESEARCH WORKING PAPERS
 
 
1.
How Robust is the R&D – Productivity relationship? Evidencefrom OECD Countries
Mosahid Khan
(1)
, Kul B Luintel
(2),
and Konstantinos Theodoridis
(3)
 
Abstract
We examine the robustness of R&D and productivity relationship in a panel of 16 OECD countries. Wecontrol for fifteen productivity determinants predicted by different theoretical models. Following the advancesin non-stationary panel data econometrics, we estimate four variants of thirteen specifications. All modelsappear co-integrated. Results are rigorously scrutinized through extensive bootstrap simulations andsensitivity checks. R&D and human capital emerge robust in all specifications making them universal driversof productivity across nations. Most other determinants are also significant. Productivity relationships areheterogonous across countries depending on their accumulated stocks of knowledge and human capital.JEL Classification: F12; F2: O3; O4; C15Key Words: R&D Capital Stocks; Multifactor Productivity; Heterogeneity; Panel Cointegration; BootstrapSimulations.
Disclaimer 
We thank Andrea Bassanini and Colin Webb for their help in data. The views expressed in this paper arethose of the authors, and do not necessarily reflect reflect the views of the Bank of England, the Cardiff Business School or the World Intellectual Property Organization. The usual disclaimer applies.(1) World Intellectual Property Organization, Geneva, Switzerland; e-mail:mosahid.khan@wipo.int (2) Cardiff Business School, Cardiff, United Kingdom; e-mail:luintelk@cardiff.ac.uk (3) Bank of England, London, United Kingdom; e-mail:konstantinos.theodoridis@googlemail.com Contact information: Economics and Statistics Division, World Intellectual Property Organization,34 Chemin des Colombettes, P.O. Box 18, CH-1211 Geneva 20, Switzerland, e-mail:chiefeconomist@wipo.int Working papers and available for download free of charge at:www.wipo.int/econ_stat 
 
 
2.
1. Introduction
Motivated by the theoretical insights of new growth models, Coe and Helpman (1995, hereafter CH) analyzepooled aggregate data on R&D and productivity for a panel of 21 OECD countries plus Israel over a period of 1971-1990. They report,
inter alia
, that domestic R&D capital and international R&D spillovers significantlyexplain domestic productivity, which supports knowledge based growth models. CH’s work broke traditionwith the previous empirical literature – primarily based on firm and/or industry level (micro) data for a singlecountry
1
– and inspired investigations on multicounty macro-panel data.Ever since, the macro econometric investigations of R&D and productivity have proliferated. This growingliterature engages four main issues, namely, channels of international knowledge spillovers, further determinants of productivity (i.e., omitted variables), econometric methodology and cross-countryheterogeneity. Research on these issues is not mutually exclusive; a considerable overlap exists in theliterature. We set the context by briefly summarizing it.The bulk of the literature focuses on the potential channels of cross-boarder knowledge spillovers. Typically,total imports (CH; Keller, 1998; Lichtenberg and van Pottelsberghe de la Potterie, 1998 (henceforth LP);Luintel and Khan, 2004), imports of capital goods (Xu and Wang, 1999; Luintel and Khan, 2009), inward andoutward FDI stocks and flows (Van Pottelsberghe de la Potterie and Litchenberg, 2001 [henceforth PL]; Lee,2006; Zhu and Jeon, 2007), information technology (Zhu and Jeon, 2007), bilateral exports (Funk, 2001),and technological proximity between nations (Park, 1995; Guellec and van Pittlelsberghe de la Potterie,2004[henceforth GP]; Lee, 2006) are modeled as potential channels of cross-border knowledge transmission.These channels (ratios) form weights for the alternative measures of foreign knowledge stocks and most of them are found to be significant conduits of international knowledge transmission.Competing theoretical models predict several determinants of productivity that are external to the sources of knowledge (i.e., beyond measured R&D capital stocks) which makes the robustness of R&D an importantissue. We denote the latter collectively as ‘non-R&D’ determinants of productivity.
2
The literature addressesthe robustness issue by augmenting the R&D capital stocks through measures of non-R&D determinants of productivity. To date, measures of human capital and productivity catch-up (Engelbrecht, 1997), import share(Edmond, 2001), business cycle (GP) and institutions (Coe, Helpman and Hoffmaister, 2009) appear to havebeen used to augment the R&D capital stocks in modeling productivity. However, considering the long list of theoretically proposed determinants (see below), this issue appears somewhat under-researched.
3
 The methodological issue has evolved with the advancement of panel data econometrics. CH applied OLSon pooled (panel) macro data and tested for the stationarity of residuals. Panel co-integration tests were notfully developed at the time. Following recent advances in panel data econometrics, interest in re-examiningthis issue surged. Some studies have applied up-to-date panel unit root and cointegration tests on CH’s dataand specifications, while others have investigated new and/or extended dataset employing these methods.Studies in this class include Kao et al. (1999), PL, Edmond (2001), GP, Lee (2006), and Coe, Helpman andHoffmaister (2009), to name but a few. Overall, they find that productivity and R&D capital stocks are co-integrated and that CH’s estimates are plausible despite their usage of OLS. The issue of parameter heterogeneity is recently raised by Luintel and Khan (2004). They show that cross-country parameters of theR&D and productivity relationship differ significantly because countries differ in their accumulated knowledgestocks.
1
See, among others, Griliches and Mairesse, 1990; Hall and Mairesse, 1995 and the review by Griliches (1988).
2
We acknowledge that it is not always convincing to lump all other determinants of productivity except for the three forms of R&D capitalstocks as non-R&D determinants. For example, it is hard to segregate ICT from its knowledge content and similar arguments may applyin other cases. However, for the sake of convenience and without any prejudice, we denote them as ‘non-R&D’ determinants throughout.
3
Of course, productivity has been separately modelled as a function of a range of other variables like cross-border flow of people(Andersen and Dalgaard, 2006), structural composition of the economy (Moro, 2007) to name but a few. However, our focus here is onthose studies that augment R&D capital stocks by other (non-R&D) determinants.

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