Developing countries derive important and substantial benefits from research and development conducted in the industrial countries. According to David Coe, Elhanan Helpman and Alexander Hoffmaister, writing in the latest issue of the Economic Journal, a 1% increase in the R&D capital stocks of the industrial countries raises output in the developing countries by an average of 0.07%. For 1990, that meant a $25 billion boost to output in the ''South'', a significant amount in the context of total aid from the ''North'' of $50 billion.
By trading with an industrial country that has large ''stocks of knowledge'' from its cumulative R&D activities, a developing country benefits from ''spillovers''. These can significantly boost its productivity: by importing a larger variety of intermediate products and capital equipment that embody foreign knowledge; and by acquiring useful information that would otherwise be costly to obtain. Hence the more open a developing country is to foreign trade, the more it will gain from R&D in the industrial countries. Coe and his colleagues note that recent theoretical developments in the study of economic growth have emphasised the importance of R&D in boosting productivity. Moreover, these studies have found that such productivity gains are not restricted to the countries that invest in R&D. This is good news for most countries in the world since 96% of world R&D is performed in the industrial countries and the great majority of countries are not in that group.
The researchers examine the quantitative importance of these theoretical effects using data for 77 developing countries over the period 1971-90. They make an estimation that relates a developing country''s total factor productivity to its foreign R&D capital stock, imports of machinery and equipment relative to GDP, and its secondary school enrolment rate. The secondary school enrolment rate acts as a proxy for the developing country''s human capital.
Since theory suggests that international trade is an important channel of transmission of productivity across countries, each foreign R&D capital stock is constructed as a weighted average of the industrial country''s R&D capital stocks, with weights based on the developing country''s bilateral trading volumes. The R&D capital stock of each industrial country is calculated from cumulative past real investment in R&D, allowing for some depreciation. The estimates suggest that foreign R&D capital stocks interact with the degree of openness of the economies, where the degree of openness is measured by the share of imports of machinery and equipment in GDP.
''North-South R&D Spillovers'' by David T. Coe, Elhanan Helpman and Alexander W. Hoffmaister is published in the January 1997 issue of the Economic Journal. Coe and Hoffmaister are at the IMF in Washington; Helpman is at Harvard University.
