How Trade Patterns and Technology Flows Affect Productivity Growth

As a factor influencing productivity, a country's own research and development to generate new technology is more important than that of the average foreign country. It is generally difficult to separate the effect of importing intermediate goods with embodied technology from the effect of other channels of international technology transmission. According to this study, international trade contributes 20 percent of the total effect on productivity from foreign research and development investments. Earlier studies of spillovers from international research and development (R&D) suggest how economies benefit from R&D conducted abroad. To the extent that countries importing new technologies do not pay in full for the increased variety in intermediate inputs in production, they are reaping an external, or spillover, effect. Keller analyzes a particular mechanism through which economies benefit from foreign R&D. He estimates the extent to which a country benefits from imports of intermediate goods that embody new technology - result of foreign investments in R&D. He distinguishes this mechanism from others unrelated to international trade. Using industry-level data for eight OECD countries (Sweden and the G-7 countries) between 1970 and 1991, he estimates the underlying model of trade and growth. This empirical analysis leads to several findings about spillovers from international R&D. First, the productivity effects of foreign R&D vary substantially, depending on which country is conducting the R&D. The quality of newly created technology varies. Second, as a factor influencing productivity, a country's own R&D is more important than that of the average foreign country. It is difficult to separate the effect of importing intermediate goods with embodied technology from a more general spillover effect; often both are present. Third, in Keller's sample of industrial countries, international trade contributes about 20 percent of the total effect on productivity from foreign R&D investments. Keller conjectures that this effect could be higher for less industrialized countries importing from OECD countries, but he stresses that alternative mechanisms (such as foreign direct investment) should be included when estimating the effects of international trade in the international diffusion of technology. This paper - product of the Development Research Group - part of a larger effort in the group to analyze the impact of trade, technology, and foreign direct investment on growth in developing countries