The report to be presented discusses the papers “R&D and Productivity: the international economy”, by Helpman, E. and “Multinational Enterprises, Technology Diffusion and Host Country Productivity Growth”, by Xu, B. Both papers focus on the effects that a country can implicate on another country’s economy, namely by international trade (ITR), foreign direct investment (FDI) and multinational enterprises (MNE) affiliates.
- Trade and FDI, as diffusion channels of technology
Investing in research and development and lowering barriers to trade and investment are frequently referenced as two of the most effective ways to stimulate economic growth. The problem attached to R&D is that almost all of it takes place in just a few of industrialized countries, a fact that would seem to make attempts to lessen income disparities between industrialized and developing countries a difficult task. However, in his paper, Helpman argues that a less-noticed benefit of liberalized trade is its potential to sustain the advantages of R&D – both products and productivity gains – to a number of countries, thus reducing the impact of asymmetrical R&D expenditures. In fact, "The larger a country's exposure to the international economy," Helpman writes, "the more it gains from R&D activities in other countries".
Helpman’s paper tries to understand how a country’s investment on R&D affects other countries’ economies. The paper identifies ITR and FDI as being two diffusion channels of technology: they are both mechanisms through which is allowed the transfer of goods/products that have certain inputs of R&D and specialized knowledge of a country A, to a country B. Plus: once this transfer is accomplished, country B has the possibility, and the natural tendency, to incorporate this knowledge in the production of they’re own domestic goods and services.
This contribution can take many forms. For example:
- when a country gets access to foreign inputs, which weren’t locally available on enough quantities or with the desired quality;
- when a country gets the opportunity to learn the production techniques;
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opportunity to learn organization methods, and the market’s modus operandi of its commercial partner;
- by providing the opportunity to imitate, although imitation can be expensive, as in the reverse engineering of complex technological goods;
Through its empirical findings, Helpman was able to demonstrate that the TFP of a country depends not only on its domestic expenditure in R&D but also on the R&D that is “exported” and performed in other countries; hence, ITR and FDI play an important role in becoming the main channels for this export and diffusion of a country’s R&D.
- Affecting countries with technology spillovers: always the same story? Or different conclusions?
The productivity associated to a domestic invention is assumed to be increasing in a country’s stock of knowledge, which is typically proportional to the number of domestically known product designs. This assumption transmits the idea that creating a new product becomes easier as the number of already known product designs is larger. Thus, by adding to the domestic knowledge stock international spillovers, we watch a raise of the productivity of domestic inventive activity. This can be called an active spillover, in the sense that the foreign blueprint becomes part of the domestic R&D stock of knowledge that can be actively used to invent new products.
According to Romer (1991), technology diffuses internationally through foreign intermediate goods. The idea is that employing the foreign intermediate good involves the implicit usage of the design knowledge that was created with the R&D investment of the foreign inventor (assuming that the knowledge associated to the product is embodied in it). As long as the intermediate good costs less than its opportunity costs - which include the R&D costs of product development - there is a gain from having access to foreign intermediate goods. This might be called a passive technology spillover: although an importing country has indirect access to the results of foreign R&D, the technological knowledge embodied in the imported intermediate as such is not available to domestic inventors - only the manufactured outcome of it is.
These views of spillover is integrated into Helpman’s view (expressed in the former question): a country’s R&D will benefit not only its own total factor of productivity (TFP), but also the TFP of the countries with which it has international relations, by trade or by direct investment.
Helpman uses the values of import share, school enrolment ratio, and elasticity of the TFP, from a set of countries, 20 of them industrialized and the remaining developing, to observe how spillovers happen. He also defines two variables:
- FRD: stock of foreign R&D (sum of foreign investments on R&D, weighted by import share);
- DRD: stock of domestic R&D (the investments a country does on R&D);
Helpman finds that for all countries, the elasticity of TFP relative to foreign R&D is proportional to the import share, which means that the more a country imports from another, then the more embodied foreign R&D it imports, and the greater should be its TFP.
The same is verified for the elasticity of TFP relative to domestic R&D, meaning that the more a country invests on “domestic” R&D, the greater TFP is, with the higher values of elasticity corresponding to the more developed countries, which are more “knowledge-sensitive”.
However, the conclusions present by Xu in his paper, are slightly different from Helpman’s. The later author believes, as discussed, that ITR and FDI are the main contributors to the TFP of a country. But Xu presents a different view, based on the role played by multinational enterprises and embodied knowledge of a country; and finds no direct evidence that FDI is, without a doubt, capable on its own to increase productivity.
Xu states that there are always technological spillovers from trade, but FDI is only expected to have a clear impact on productivity, when the hosting country human resources have a certain degree of education. Xu exemplifies this through a series of calculations, based on examples with sets of countries: Australia, Canada and Mexico vs Venezuela and Morocco. The first group are countries which showed gains of productivity, after FDI by MNE’s; the second group are countries which also had FDI by MNEs, but showed no gains of productivity.
Xu finds that, for developed countries, the importance of MNEs for gains of productivity is nearly as high as international trade (ITR+MNEs represent a 1,34% increase in productivity, with MNEs contributing with 40% of that value). However, for less developed countries, the presence of MNEs also raises productivity, but such gains might have origin on factors other than technological spillovers, such as the increased competition, or, has stated by Romer, the spillovers are of the passive kind: the receiving country only can benefit the knowledge of the manufactured outcome, because the knowledge base isn’t sufficient to seize the hole benefits presented by the foreign product.
In deed, according to the author, less developed countries might not have the human resources capable of absorbing the spillovers that come with the MNE affiliates, establishing a threshold below which the hosting nation won’t regard the MNE as a diffusion channel of technology.
Hence, we cannot say that technological spillovers affect each country in the same way. It all depends on national characteristics regarding not only they’re intrinsic knowledge base foundation, but also they’re economical and social basis.
- Bibliography
[1] Helpman, E. (1997), “R&D and Productivity: The International Connection”, NBER Working Paper Nº 6101.
[2] Xu, B. (2000), “Multinational Enterprises, Technology Diffusion, and Host Country Productivity Growth”, Journal of Development Economics, 62, 477-93.
[3] Keller, W. (2001), “International Technology Diffusion”, National Bureau of Economic Research, working paper
[4] Xu, B. and Wang, J. (2000), “Trade, FDI and International Technology Diffusion”, Journal of Economic Integration
