The impact of domestic and foreign R&D on TFP in developing countries

Abstract

• The cross‐sectional and time variation in the level and growth rate of TFP in developing countries can be explained by semi-endogenous growth models. • Domestic R&D has a significant and positive association with TFP in developing countries. • Domestic R&D has a substantially greater effect on domestic TFP in developing countries than foreign R&D. • Machinery and equipment imports are a channel through which technology is transferred from developed to developing countries, but this technology transfer effect is significant only for middle-income countries. • The impact of domestic R&D on TFP is greater in middle-income than in low-income countries. There are few studies on the impact of domestic R&D on TFP in developing countries and even less on the impact of both domestic and foreign R&D on TFP in developing countries. Only one of these studies—a single-country study—also tests semi-endogenous and Schumpeterian R&D growth models against each other. All these studies focus on a relatively small number of developing countries, and none examines the extent to which there are differences in the effects of domestic R&D and international R&D spillovers on TFP between middle- and low-income countries. Using a large panel of countries, this study ( i ) tests the predictions of Schumpeterian theory against the predictions of semi-endogenous theory regarding the R&D-TFP relationship for developing economies, ( ii ) examines and compares the effects of domestic R&D and international R&D spillovers on TFP in developing countries, and ( iii ) investigates differences in the effects of domestic R&D and international R&D spillovers on TFP between middle- and low-income countries. It is found that an increase in the level (growth rate) of domestic R&D expenditures has a positive effect on the level (growth rate) of TFP, as semi-endogenous growth theory predicts, but this effect is greater in middle-income than in low-income countries. It is also found that domestic R&D has a much greater effect on TFP in developing countries than international R&D spillovers.