How trade patterns and technology flows affect productivity growth

This paper presents a model of international trade in differentiated intermediate goods. Because intermediates are invented through costly R&D investments, employing foreign intermediates implies sharing the return to R&D with the inventor country. We first derive how domestic productivity is related to foreign R&D investments. In the subsequent empirical analysis, industry level data for eight OECD countries between 1970-91 is used to estimate that relation. The robustness of interpreting empirical findings is emphasised, to which effect Monte-Carlo techniques are employed, and the part of international R&D spillovers that is related to trade is quantified. We find evidence, first, that domestic and foreign R&D affect productivity differently, in contrast to assuming symmetric effects. Second, the productivity effects resulting from R&D vary substantially by which country conducts the R&D. Third, we find that the composition of a country's import partners does not significantly affect the estimated effect from foreign R&D, indicating a large component in the benefit from foreign R&D which is not related to trade. Lastly, it is estimated that international trade contributes about 20% to the total productivity effect from foreign R&D.