Panel of Oecd Industries

Many writers have claimed that research and development (R&D) has two ‘faces’. In addition to the conventional role of stimulating innovation, R&D enhances technology transfer by improving the ability of firms to learn about advances in the leading edge (‘absorptive capacity’). In this paper we explore this idea empirically using a panel of industries across twelve OECD countries. We find evidence that R&D is statistically and economically important in this catch up process as well as stimulating innovation directly. Human capital also plays an major role in productivity growth, but we only find a small impact of trade. Because R&D matters so much for growth through catchup, social rates of return have been underestimated by studies that focus only on the U.S. JEL CLASSIFICATION: O0, O3, O4