Does innovation activity affect trade openness? An ARDL bounds testing approach for 10 European countries

Abstract

International differences in technological activity are considered a fundamental factor in explaining differences in both levels and trends between countries’ exports, imports, and income, especially among industrialized nations. This study examines the effects of innovation activity (measured by R&D expenditure and patent applications) and economic growth (GDP per capita) on trade openness (the ratio of imports plus exports to GDP) in 10 European countries from 1983 to 2018 using time series analysis. We also investigate the impact of the Lisbon and Europe 2020 strategies on trade openness. We use autoregressive distributed lag methodology and Granger causality tests based on the vector error correction model to conduct the analysis. The empirical findings indicate a strong long-run relationship among the variables in all the countries examined. In most countries, the long-run coefficients of R&D expenditure, patent applications, and GDP per capita are positive and statistically significant. In short-run dynamics, error correction models are well-defined and provide interesting results for each country. The effects of the Lisbon Strategy and Europe 2020 differ across the countries examined. Finally, the Granger causal relationships among the variables vary across countries.