Trade liberalization and R&D activity: examining long-run and short-run linkages for individual and panel of leading countries and groups

Abstract

It has been an established fact that R&D activities and international trade is correlated but the directions of causal interplays between them have not yet been unambiguously established. Most of the theoretical and empirical studies revealed that trade liberalization led to R&D expansion but not the reverse. But empirically, it may happen that R&D activity may cause more trade associations. Under this juncture, the present study aims to examine the long-run associations and short-run dynamics between trade indicator, share of net FDI inflow to GDP, and R&D intensity for the leading countries and groups and their panels in R&D spending. By developing a theoretical model, the study makes empirical verifications such as cointegration, error correction, and Granger causality tests for the individual countries and groups and then compared the results by taking dynamic panel of the countries and groups. The results reveal that R&D and FDI are unambiguously cointegrated and thus have long-run equilibrium relations in the panel data format unlike the situations of individual country and groups. Further, for the short run, the panel study reveals both way causal relations between the two variables. It is thus suggested that policy and lawmakers should implement plans such as increase in research fund in R&D through public–private partnership, ease on patent system, etc., to welcome FDI.