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Working paper

How R&D Expenditures Influence Total Factor Productivity and Technical Efficiency?

Alexander Yu. Apokin, Irina B. Ipatova.
In this paper we estimate the impact of R&D expenditures on the total factor productivity (TFP) and technical efficiency of two panels of countries in the period 1990-2011. We obtain TFP decomposition estimates using one- and two-step Stochastic Frontier Analysis (SFA) and a modified (O’Donnell, 2008) Data Envelopment Analysis (DEA) framework. Our estimates of TFP growth rates correlate highly with those of OECD, The Conference Board and PWT. The efficiency-based rankings of the countries are similar to those from the results of other studies. The estimates of R&D’s impact on TFP and technical efficiency were obtained controlling for various factors, including the structure of the economy, institutional and infrastructural development and R&D expenditures over a total of five hundred possible model specifications. We found that the increase in total R&D expenditures by 1% of GDP in five years raises the average TFP growth rate by 5.0 to 7.7 percentage points, depending on the sample. Also, raising total R&D expenditures by $1,000 per researcher raises TFP growth five years later by 0.013 to 0.025 percentage points, depending on the sample. Also we have identified a significant impact of lagged R&D expenditures (up to ten years) on the dynamics of the global technology frontier component in the presence of a number of control variables.