R&D Races and Spillovers between the EU and the US: Some Causal Evidence

This paper examines the causal relationships between the R&D sector activities of the EU and the US in a multivariate framework. As a novelty in this literature, we employ the subset transfer function methodology to account for the possibility of “dry holes” in the effects of R&D efforts on economic activity. We find that R&D activity in the EU is a direct Granger-cause of both R&D and economy-wide productivity in the US, and the effects are negative. On the other hand, the EU reacts positively to increases in R&D productivity in the US. Thus, the US can be said to respond submissively to an R&D move by the EU, while the EU’s reaction to the R&D efforts by the US firms is on the aggressive side. These findings are largely in line with the actual developments in the productivity differentials between the EU and the US and the patterns in their relative shares in the world market for high tech exports.