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

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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.

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Fig. 1
Fig. 2

Source: Sketched by the authors

Fig. 3

Source: Sketched by the authors

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Notes

  1. This production technology is similar to that of Krugman (1979) and Aditya and Acharyya (2015), apart from the fact that instead of labor being used as both fixed and variable inputs or capital being used as the fixed input and skilled labor as the variable factor, in our case skilled labor has been used as a fixed factor and capital has been used as variable factor.

  2. In theory, the causal relation between trade and R&D has been claimed mainly in one direction, that is, from the trade liberalization to R&D expansion (Hughes 1986; Rodrik 1992; Aghion, 2003; Gervais and Thurk 2011; Fracasso and Marzetti 2015).

  3. To understand the matter more intuitively one can go through the Sect. 2.

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Acknowledgements

The authors deeply acknowledge the insightful comments and suggestions offered by the anonymous referees that helped immensely in enriching the article. Besides, they acknowledge the data supplying sources as mentioned in the text which helped us to make empirical investigations on the said objectives.

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The study has been done without the help of any funding agency.

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Authors and Affiliations

  1. Vidyasagar University, Midnapore, India

    Ramesh Chandra Das

  2. Ananda Chandra College, Jalpaiguri, India

    Tonmoy Chatterjee

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  1. Ramesh Chandra Das
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Correspondence to Ramesh Chandra Das.

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Das, R.C., Chatterjee, T. Trade liberalization and R&D activity: examining long-run and short-run linkages for individual and panel of leading countries and groups. Econ Change Restruct 54, 1091–1118 (2021). https://doi.org/10.1007/s10644-020-09294-5

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