Innovation and Export Volumes and Prices: A Disaggregated Study

The paper explores the role of innovation in the determination of both net exports and export prices. The analysis is conducted for 36 industry groups covering both manufacturers and services in the UK. The data are annual time series and these are analysed using the techniques of cointegration to establish the existence of significant time-series relationships between innovation and trade performance. Alternative econometric estimates of these relationships were obtained for 24 manufacturing industries using patents as the indicator of scientific advance and rising product quality in place of innovations. Patents provide a measure of relative technological performance of the United Kingdom, but for a smaller range of economic activities. The empirical findings support the view that successful R&D (which can raise product quality or reduce production costs) and good industrial relations (which improve a reliability of supply) have quantitatively significant impacts on the balance of trade in a variety of industries and services. Our findings also raise concern over issues of measurement quality for the monitoring of both input to and outputs from the R&D production process, which is critical for designing policy to improve performance.