Business expenditures on R&D and trade performances in Australia: Is there a link?

This paper empirically examines the dynamic causal link between business R&D expenditures and trade performance in Australia. Based on cointegration and errorcorrection modeling Granger causality tests, variance decomposition and impulse response functions are used for this purpose. The results show that there is a long-run relationship exists between the trade variables and R&D expenditure and a unidirectional causality run from R&D expenditure to exports, imports and net exports. Further, the variance decomposition and impulse response functions confirm that a significant portion of fluctuations in the trade variables beyond the sample period is explained by R&D expenditure. Therefore, government policies that lift expenditures on business R&D are shown to contribute to the narrowing of Australia’s chronic trade deficits.