Public R&D and Growth: A dynamic Panel VECM Data Analysis for 14 OECD Countries

We start from five economic relations of research and development R&D driven growth for 14 OECD countries: GDP and technical change; technical change and private business R&D; domestic private and public R&D; domestic and foreign public R&D; foreign private and public R&D. Cointegration tests force us to go from these five pairs to four triples of these variables. We establish the four relations through (i) panel cointegration tests and (ii) a panel vector-error-correction model (VECM) with cross-section fixed effects in the differenced part and long-term relations from group mean versions of FMOLS and DOLS (fully modified and dynamic OLS) estimation (also with fixed effects), which are the current econometric standard for panel VECMs with homogenous adjustment coefficients and slopes in the differenced terms. Public R&D has positive long-run regression coefficients for direct effects on productivity and indirect ones via private R&D. Shocks on the intercepts of the public R&D growth equation of the VECM enhance private R&D, technical change, and GDP in a statistically significant way. Permanent changes of foreign public and private R&D have positive growth effects, which are transitional for foreign public R&D.

Keywords: Growth, R&D, productivity, OECD, panel coinegration, panel VECM

JEL Classification: O19, O47, O50