International and Intersectoral R&D Spillovers in the OECD and East Asian Economies

This study empirically explores international and intersectoral R&D spillover effects on the total factor productivity growth of manufacturing and nonmanufacturing sectors based on a pooled time-series data set of 14 OECD economies and 3 East Asian economies--Korea, Singapore, and Taiwan. The study finds that foreign manufacturing R&D has strong influence on domestic productivity growths of both sectors and that domestic manufacturing R&D has a substantial intersectoral R&D spillover effect on domestic nonmanufacturing productivity growth. The social rates of return to manufacturing R&D are estimated to be two to six times greater than the private rates of return. (JEL D24, 033, F10) I. INTRODUCTION Research and development (R&D) activity, which provides a key to success in productivity competition, has been performed disproportionately across sectors and across economies. This observation may reflect the nature of the production technology of each sector and the needs of each country at its respective developmental stage. As discussed in the R&D spillover literature, if there are linkages through the use of technology-embodied intermediate goods or through other transmission mechanism across sectors and across economies, R&D investments in one sector of a country could bring about productivity rise not only in its performing sector but also in other sectors and in other countries. The R&D activities in the Organisation for Economic Co-operation and Development (OECD) and East Asian economies have been heavily concentrated in the manufacturing sectors in the past two decades, even though the share of the manufacturing sector is relatively small in comparison with the rest of the aggregate economy in these countries. (1) One intriguing issue is to identify the magnitude of influence of manufacturing R&D on the productivity of the remaining nonmanufacturing sector as well as its influence on the productivity of other countries. This study addresses this and other related issues in a two-sector empirical model of international and intersectoral R&D spillovers on the total factor productivity (TFP) of manufacturing and non-manufacturing sectors based on the pooled time-series data set of the 14 OECD economies and three East Asian newly industrialized economies (NIEs) over the period 1980 to 1995. (2) The two different groups of countries in the sample--the OECD and the East Asian economies--increase the variations in the cross-section. Given the recent success and substantial increase in the indigenous R&D investments in the manufacturing sectors of the East Asian economies, this study investigates further whether the international R&D spillovers arise from these countries as well. Most empirical studies on international R&D spillovers have focused on R&D effects across business sectors of OECD economies, including the pioneering work of Coe and Helpman (1995). (3) Few empirical studies exist that allow for simultaneous presence of international and intersectoral R&D spillovers, and they all focus on spillovers across disaggregate manufacturing sectors within and among OECD countries. Keller (2002) estimates international and intersectoral R&D spillovers using industry-level data of 13 manufacturing industries in 8 major countries, where his findings show significant presence of R&D spillovers, both domestically and internationally. (4) Using a panel cointegration estimation procedure and using transaction intensity and patent space to construct R&D spillover variables, Frantzen (2002) confirms the findings of Keller (2002). This study complements the literature on international and intersectoral R&D spillover effects by considering the impact of international and intersectoral R&D spillovers between manufacturing and nonmanufacturing sector productivity, an issue that was never addressed in previous studies. …