Business expenditures on R&D and trade performances in Australia: is there a link?

Abstract

This article, empirically examines the dynamic causal link between business research and development (R&D) expenditures and trade performance in Australia. Based on cointegration and error-correction modelling, Granger causality tests, variance decomposition and impulse response functions are used for this purpose. The results show that a long-run relationship exists between the trade variables and R&D expenditure and a unidirectional causality run from R&D expenditure to exports, imports and net exports. Further, the variance decomposition and impulse response functions confirm that, a significant portion of fluctuations in the trade variables beyond the sample period is explained by R&D expenditure. Therefore, government policies that lift expenditures on business R&D are shown to contribute to the narrowing of Australia's chronic trade deficits.