North-South R&D Spillovers

North-South R&D Spillovers by David T. Coe,
Elhanan Helpman, and Alexander W. Hoffmaister

This paper examines the extent to which less developed countries that
hardly invest in research and development themselves benefit from the R&D
that is performed in the industrial countries. Recent theoretical arguments
suggest that international trade plays an important role as a transmission
channel for R&D spillovers to the less developed countries. This study
provides quantitative estimates of these effects for a group of 77
developing countries based on equations that relate a developing country's
overall productivity to the foreign R&D capital stock, the share of imports
from industrial countries in the developing country's GDP, and the secondary
school enrollment rate. The foreign R&D capital stock consists of a
weighted average of the domestic R&D capital stocks of 22 industrial
countries with which the developing country trades, using bilateral import
shares with the industrial countries as weights.

The results imply that a developing country's total factor productivity
is larger the greater is its foreign R&D capital stock, the more open it is
to trade with the industrial countries, and the more educated is its labor
force. In addition, a developing country has higher productivity when its
trade is more biased towards industrial countries that have large cumulative
experiences in R&D. A developing country with a larger import share in GDP
or a higher secondary school enrollment rate is also more productive. In
the preferred specification, the foreign R&D capital stock only affects
productivity when interacted with the import share. This implies that a
country that is more open to trade derives a larger marginal benefit from
foreign R&D, and a country that has a larger foreign R&D capital stock gains
more productivity from a marginal percentage increase in imports.

The estimated elasticities suggest that the R&D spillovers from the
North to the South are significant and substantial. The implied rates of
return--the rise in real GDP of the developing countries resulting from a
100 U.S. dollar increase in the domestic R&D capital stock of an industrial
country--are large. They suggest, for example, that an addition of
100 dollars to either the U.S. or Japanese domestic R&D capital stock raises
total GDP in the 77 developing countries as a group by almost 25 dollars.
The paper concludes that R&D spillovers from the industrial countries in the
North to the less developed countries in the South are substantial.