R&D races and spillovers between the EU and the US: Some causal evidence

This paper examines the relationships between the R&D sector activities of the EU and the US using multivariate Granger-causality tests. The multivariate framework employed also allows us to make causal inferences about the effects of R&D activity on labour productivity in the home and foreign country. As a novelty, 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. Our estimation results indicate that R&D activity in the EU is a direct Granger-cause of both R&D and labour 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. 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.