Openness to trade, research and development and growth

Abstract

This thesis comprises of four major papers concerning the effects of international trade on research and development (R&D) and growth. Taken together, the papers suggest the presence of significant links between openness to trade and growth through R&D. I argue that it is critical to establish the nature of such relationships if we are to correctly understand economic growth at a macroeconomic level. I contribute to the existing literature both by suggesting an alternative mechanism driving an integration/growth relationship and by providing new empirical evidence on some major questions of theoretical ambiguity.

By drawing on the industrial organisation (IO) literature concerning innovation and market structure, I demonstrate how economic integration can affect R&D and growth purely through intensity of competition effects. This contributes to the trade/growth literature by adding a new mechanism that does not rely on the usual scale effects and also provides further support of the IO literature that suggests there is a negative relationship between market concentration and R&D expenditure.

The overall theoretical ambiguity concerning the integration/R&D relationship coupled with the importance placed on R&D in many models of trade and growth implies a critical role for direct empirical evidence of the R&D/openness relationship. Given the notable lack of such evidence in the literature, I make a substantial contribution by examining the effect of openness to trade on R&D expenditure at industry level across a panel of OECD countries. This new evidence generally supports the existence of a positive openness/R&D relationship, although there is considerable variation across sectors. In addition, the exposition of estimation issues arising from the nature of the data coupled with the dynamic specification of the R&D equation is likely to prove a useful contribution to the foundations for further research.

The existing literature identifies knowledge spillovers as a key mechanism through which trade can affect technological progress and growth. I provide new evidence of the nature of knowledge spillovers in UK manufacturing, allowing for spillovers through foreign direct investment (FDI) in addition to trade in goods. FDI has not previously been included in such a sectoral-level study of spillovers and the discussion of the difficulties in estimating the model are likely to provide a useful starting point for further research. My results are somewhat counter-intuitive in that they suggest foreign R&D may have a negative effect on UK productivity in some sectors. A number of possible explanations for this are suggested, providing a further contribution to the burgeoning spillover literature.

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