not have been produced at home at all, or only at much higher cost. Firms in newly industrializing economies like Korea and Taiwan (China) have often strengthened their technological understanding and capabilities by “reverse engineering” of imported capital equipment. Exhibit 1 shows that East Asian ratios to GDP for imports of machinery and transport equipment (including much of what are classified as ‘high technology’ goods) are mostly well above levels associated with other countries at similar per capita income levels.<sup>5</sup> Table 2 above showed that 3-4 times more firms in East Asian low and middle income economies reported capital equipment purchases as their most important means of acquiring

# **<mark>Exhibit 1</mark>**

<!-- Start of picture text --> Machinery & Transport Equipment Imports*<br>(% of GDP) and Per Capita GDP<br>70<br>* After controlling for country size.<br>Singapore<br>60<br>Source: World Bank World Development<br>Indicators. 134 developing and developed<br>50 economies. Hong Kong<br>40<br>Malaysia<br>30<br>20 Philippines<br>Thailand<br>10 VietnamChina<br>0<br>2.5 3 3.5 4 4.5 5<br>-10 Japan<br>Korea<br>Indonesia<br>-20<br>Per Capita GDP (PPP, Log)<br>Machinery & Transport Eqpt. Imports<br><!-- End of picture text --> technology.

A number of studies have provided indirect evidence for the effectiveness of imports as a channel for knowledge acquisition, observing that R&D in OECD countries has a positive impact on other countries’ total factor productivity, and that this effect tends to rise with the recipient country’s openness to imports. (Coe and Helpman, 1995; Coe, Helpman and Hoffmeister, 1997.) Interestingly, East Asian Newly Industrialized Economies like Hong Kong, Singapore and Korea were found to have elasticities of TFP to foreign R&D stocks generally higher than the average for developing economies. Later studies have mainly confirmed and elaborated these results. Keller (2002) is one of relatively few studies to look jointly at the impact of international trade, foreign direct investment and disembodied knowledge flows (for example through direct communication) as channels of knowledge flow.<sup>6</sup> He finds that all three channels are significant, but that imports are the most important, explaining about two thirds of the estimated impacts, while FDI and disembodied flows (as measured) explain about one sixth each on average.<sup>7</sup> 5 Geographically small countries tend to export and import more per dollar of GDP than do large ones. Exhibit 1 shows import to GDP ratios after adjustment for this country size effect.

6 Keller (2002) proxies disembodied knowledge flows by bilateral language skills – the proportion of the population recipient country who speak the language of the spillover sender country. The study looks at knowledge flows at the industry level among countries at the world’s technology frontier – the G7 industrialized economies.

7 Among other investigations, Xu and Wang (1999) find that imports of capital equipment provide a better index for measuring R&D spillovers than trade as a whole. Schiff, Wang and Olarreaga (2002) look not only at the impact on developing countries’ productivity of R&D stocks accumulated in the ‘North’, but also those accumulated in the ‘South’, i.e. in developing countries. They find that productivity in developing economies does rise with R&D in other developing economies (and thus with openness to these economies), but that the elasticity is smaller than with respect to R&D in the North. They find that these kinds of South-South R&D spillovers are mostly important for industries that have a low R&D intensity, but not for high R&D intensity industries, which instead benefit most from R&D in the North (and openness to the North).

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