Benefits of R and D Spill Over to Trading Partners

We find that the benefit derived from foreign R and D in the same industry is in the order of 50-95 percent of the productivity effect of its own R and D.

One industry's investment in research and development (R and D) enhances more than just its own productivity. It can also generate a measurable economic rippling effect that stimulates productivity gains both at home and, most noticeably, abroad. In Trade and the Transmission of Technology (NBER Working Paper No. 6113), Wolfgang Keller shows how one industry's investment in R and D has the potential to spark near-identical efficiency gains in the industrial counterparts of its foreign trading partners. Meanwhile, domestically, the positive effects of that initial R and D can also spread to other industrial sectors, causing noticeable boosts in productivity.

Keller examines R and D spending, trade flows, and productivity gains between 1970 and 1991 for a range of manufacturing industries in eight of the world's leading industrialized countries. (The group includes all of the G-7 nations, plus Sweden.) He first confirms that "R and D expenditures are positively related to productivity levels." He then goes on to conclude that the R and D spending by an industry in one country can benefit the same industry in another country, almost as much as if it had made the investment itself.

"We find that the benefit derived from foreign R and D in the same industry is in the order of 50-95 percent of the productivity effect of its own R and D," Keller states. "These results are consistent with international trade being an important transmittent of foreign technology in the same industry."

Keller also determines that, domestically, the R and D benefits from one industry can spillover into other sectors (mainly, as they provide other industries with technologically superior "intermediate goods"). He estimates that, overall, R and D conducted outside a given industry is "one-fifth to one-half as effective in raising productivity" as the R and D investments within the industry. This means that "industries benefit generally more from foreign technology creation in the same industry than from domestic technology creation in other industries."