The Role of R&D in Trade Expansion: A Semi-parametric Gravity Specification for East and West Asia

Abstract

In more recent years, it has become increasingly recognized that R&D (research and development) is a key driver of economic growth, a source of innovation and change, and as such stimulates improvements in productivity and economic competitiveness. It is closely associated with knowledge and flexibility, two factors that have gained new significance as a source of competitiveness in an increasingly globalized world economy. In this paper the relationship between bilateral trade and R&D differences among selected east and west Asian countries is investigated, specifying a semi-parametric gravity model over 1990-2013. Despite the majority of empirical analysis, we explore the relationship between trade and R&D differences through a nonparametric analysis. The results confirm that there is a nonparametric relationship between bilateral exports and R&D differences for both. The implication is that countries with various levels of R&D activities, namely arising from entrepreneurial activities, can affect widely and substantially international trade flows.

JEL Classification: C14, F15, O30