KNOWLEDGE SPILLOVER AND TOTAL FACTOR PRODUCTIVITY ACROSS COUNTRIES: ROLE OF FINANCIAL DEVELOPMENT

Abstract

The general objective is to evaluate the impact of financial development on the connections between knowledge spillover and Total factor productivity (TFP). By using CS_ARDL econometric techniques the results shows that knowledge spillover promotes productivity expansion, as shown by the baseline regression, which holds true regardless of the structural and institutional elements included in the models. Moreover, our study hypothesis, that knowledge spillover affects TFP in nations with better financial system, is corroborated by our results. The findings indicate that the effects of knowledge spillover and financial development on TFP are mutually reinforcing. These results validate the idea that countries better financial system to successfully absorb foreign R&D will obtain the greatest benefits from knowledge spillover. According to the results, the disparities in national wealth shown over the past two decades may be the result of complementing policies adopted by different nations. Thus, greater total factor productivity and/or economic growth necessitate policy complementarity. A rise in knowledge spillover would not improve TFP and/or GDP growth in countries that have not implemented complementary reforms. Since these conditions are necessary for these countries to benefit fully from knowledge spillover, failing to provide them will result in a loss of potential gains. Keywords: Knowledge Spillovers; Total Factor Productivity; Financial Development