International R&D Spillovers

Investment in research and development (R&D) affects a country's total factor productivity. Recently new theories of economic growth have emphasized this link and have also identified a number of channels through which a country's R&D affects total factor productivity of its trade partners. Following these theoretical developments we estimate the effects of a country's R&D capital stock and the R&D capital stocks of its trade partners on the country's total factor productivity. We find large effects of both domestic and foreign R&D capital stocks on total factor productivity. The foreign R&D capital stocks have particularly large effects on the smaller countries in our sample (that consists of 22 countries). Moreover, we find that about one quarter of the worldwide benefits of investment in R&D in the seven largest economies are appropriated by their trade partners.