International R&D Spillovers: the Role of Free Trade Agreements and Institutions

Using a sample of 15 OECD countries, this paper investigates whether free trade agreements (FTAs) enhance R&D spillovers across national borders and if institutions play some role in affecting this knowledge diffusion process. Dynamic panel regressions employing advanced estimation technique lend strong support to these hypotheses. The paper finds that a country’s total factor productivity significantly benefits from trade weighted foreign R&D as trade strengthens the country’s access to foreign knowledge pool. By creating more trade with partner countries, FTAs further improve the country’s productivity. With regards to institutional factors, countries where the form of government is mainly parliamentary tend to benefit less from their own innovative efforts but more from international R&D spillovers. In addition, countries having both plural and proportional rules of election are generally associated with higher returns to domestic R&D but lower international R&D spillovers as compared to those having a mono rule system.