Estimating The Impact Of R&D Spending On Total Factor Roductivity For OECD Countries: Pooled Mean Group Approach

Abstract

Growth accounting models consider technology as exogenous which are determined outside the model. Even though Solow type model measures the contribution of technology as residual which is left over from the contribution of labor and capital, it does not provide tool to directly assess the role of technology. Endogenous growth models emerged to overcome this shortcoming. In the recent decades, many empirical studies have explored the direct role of technological change in economic growth in the long-run. Researchers have used various variables to endogenously study factors affecting economic productivity. R&D spending is considered one of those factors. However, since it takes a longer time to see the impact of R&D spending, many developing countries do not truly appreciate its importance for economic growth. This paper is aimed to provide further evidence by exploring the relationship between total factor productivity (TFP), information and communication technology (ICT) capital services, R&D expenditures, and a set of auxiliary variables (labor quantity, labor quality, non-ICT capital services) using the Pooled Mean Group approach for OECD countries. The objective is to show if and to what extent TFP is sensitive to ICT and R&D over both long- and short-term periods by controlling for auxiliary determinants. The study has found a positive significant relationship between TFP and ICT capital services over the long-run, and between TFP and both ICT capital services and R&D expenditures over the short-run. It is also found that TFP positively responds to changes in all auxiliary determinants over the short-run. The impact of all variables on TFP is smaller for short-term than long-term. The study highlights the great importance of investing in R&D by developing countries to catch up with the developed countries. The findings are expected to encourage developing countries to invest more in R&D to accomplish long-term sustainable and competitive economic growth.