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International R&D spillovers and unobserved common shocks

  • Diego-Ivan Ruge-Leiva

This paper investigates the effects of the domestic and foreign R&D weighted by bilateral imports on productivity accounting for the heterogeneous impact of unobserved micro and macroeconomic common shocks, which are modeled in a multifactor error structure. Using a panel of 50 economies from 1970-2011, I find that when unobserved common shocks are not regarded, as has been done by the literature in this area, estimates of domestic R&D and foreign R&D might be biased and inconsistent. Once unobserved common shocks are accounted for, by allowing for heterogeneous technology coefficients, significant estimates become more sizable, consistent and not seriously biased in most cases. However, these estimates might be capturing not only returns to domestic R&D and trade-related knowledge spillovers, but also unobserved common spillovers and other effects. This indicates that knowledge spillovers and effects of unknown form cannot be easily separated. Therefore, unobserved common shocks should be considered when estimating returns to domestic R&D and international R&D spillovers.

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File URL: http://www2.uah.es/iaes/publicaciones/DT_08_14.pdf
File Function: First version, 2014
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Paper provided by Instituto Universitario de Análisis Económico y Social in its series Working Papers with number 08/14.

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Length: 74 pages
Date of creation: Jul 2014
Date of revision:
Handle: RePEc:uae:wpaper:0814
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  1. M. Hashem Pesaran & L. Vanessa Smith & Takashi Yamagata, 2008. "Panel Unit Root Tests in the Presence of a Multifactor Error Structure," CESifo Working Paper Series 2193, CESifo Group Munich.
  2. Alexander Chudik & M. Hashem Pesaran, 2013. "Common Correlated Effects Estimation of Heterogeneous Dynamic Panel Data Models with Weakly Exogenous Regressors," CESifo Working Paper Series 4232, CESifo Group Munich.
  3. Pesaran, M.H. & Smith, R., 1992. "Estimating Long-Run Relationships From Dynamic Heterogeneous Panels," Cambridge Working Papers in Economics 9215, Faculty of Economics, University of Cambridge.
  4. John Van Reenen & Nick Bloom & Steve Bond, 2006. "Uncertainty and investment dynamics," LSE Research Online Documents on Economics 2645, London School of Economics and Political Science, LSE Library.
  5. Pesaran, M. Hashem & Tosetti, Elisa, 2011. "Large panels with common factors and spatial correlation," Journal of Econometrics, Elsevier, vol. 161(2), pages 182-202, April.
  6. M. Hashem Pesaran, 2004. "General Diagnostic Tests for Cross Section Dependence in Panels," CESifo Working Paper Series 1229, CESifo Group Munich.
  7. Alexander Chudik & M. Hashem Pesaran, 2013. "Large panel data models with cross-sectional dependence: a survey," Globalization and Monetary Policy Institute Working Paper 153, Federal Reserve Bank of Dallas.
  8. Chudik, A. & Pesaran, M.H. & Tosetti, E., 2009. "Weak and Strong Cross Section Dependence and Estimation of Large Panels," Cambridge Working Papers in Economics 0924, Faculty of Economics, University of Cambridge.
  9. Wolfgang Keller, 1996. "Are International R&D Spillovers Trade-related? Analyzing Spillovers among Randomly Matched Trade Partners," International Trade 9608002, EconWPA.
  10. Baltagi B-H & Bresson G. & Pirotte A., 2005. "Panel Unit Root Tests and Spatial Dependence," Working Papers ERMES 0503, ERMES, University Paris 2.
  11. Nick Bloom, 2007. "Uncertainty and the Dynamics of R&D," American Economic Review, American Economic Association, vol. 97(2), pages 250-255, May.
  12. Chudik, Alexander & Mohaddes, Kamiar & Pesaran, M. Hashem & Raissi, Mehdi, 2013. "Debt, inflation and growth robust estimation of long-run effects in dynamic panel data models," Globalization and Monetary Policy Institute Working Paper 162, Federal Reserve Bank of Dallas.
  13. M. Hashem Pesaran, 2007. "A simple panel unit root test in the presence of cross-section dependence," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(2), pages 265-312.
  14. Mark Funk, 2001. "Trade and International R&D Spillovers among OECD Countries," Southern Economic Journal, Southern Economic Association, vol. 67(3), pages 725-736, January.
  15. Natalia Bailey & Sean Holly & N. Hashem Pesaran, 2013. "A Two Stage Approach to Spatiotemporal Analysis with Strong and weak cross Sectional Dependence," Cambridge Working Papers in Economics 1362, Faculty of Economics, University of Cambridge.
  16. Peter Klenow & Andrés Rodríguez-Clare, 1997. "The Neoclassical Revival in Growth Economics: Has It Gone Too Far?," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 73-114 National Bureau of Economic Research, Inc.
  17. Eberhardt, Markus & Helmers, Christian & Strauss, Hubert, 2010. "Do spillovers matter when estimating private returns to R&D?," Economic and Financial Reports 2010/1, European Investment Bank, Economics Department.
  18. Zvi Griliches, 1979. "Issues in Assessing the Contribution of Research and Development to Productivity Growth," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 92-116, Spring.
  19. Donald W. K. Andrews, 2005. "Cross-Section Regression with Common Shocks," Econometrica, Econometric Society, vol. 73(5), pages 1551-1585, 09.
  20. Bravo-Ortega, Claudio & García Marín, Álvaro, 2011. "R&D and Productivity: A Two Way Avenue?," World Development, Elsevier, vol. 39(7), pages 1090-1107, July.
  21. Francesco Moscone & Elisa Tosetti, 2009. "A Review And Comparison Of Tests Of Cross-Section Independence In Panels," Journal of Economic Surveys, Wiley Blackwell, vol. 23(3), pages 528-561, 07.
  22. Park, Jungsoo, 2004. "International student flows and R&D spillovers," Economics Letters, Elsevier, vol. 82(3), pages 315-320, March.
  23. M. Hashem Pesaran, 2006. "Estimation and Inference in Large Heterogeneous Panels with a Multifactor Error Structure," Econometrica, Econometric Society, vol. 74(4), pages 967-1012, 07.
  24. David T. Coe & Alexander W. Hoffmaister, 1999. "Are there International RandD Spillovers Among Randomly Matched Trade Partners? A Response to Keller," IMF Working Papers 99/18, International Monetary Fund.
  25. Markus Eberhardt, 2012. "Estimating panel time-series models with heterogeneous slopes," Stata Journal, StataCorp LP, vol. 12(1), pages 61-71, March.
  26. Edmond, Chris, 2001. "Some Panel Cointegration Models of International R&D Spillovers," Journal of Macroeconomics, Elsevier, vol. 23(2), pages 241-260, April.
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