Foreign R&D spillovers to the USA and strategic reactions

This paper serves three purposes, using a vector-error-correction model (VECM) to analyse the effects of permanent changes in R&D variables. First, we re-consider the traditional result of zero or negative foreign R&D spillovers to US productivity from private and public foreign R&D stocks. Both have a positive and statistically significant effect on labour-augmenting technical change (LATC) and public R&D in the USA. Moreover, US private R&D reacts positively to foreign private R&D and negatively to foreign public R&D shocks. Second, we also find new results for the effects of changes of US R&D. Foreign public and private R&D react positively to US public R&D. All the mentioned variables react positively to changes in US private R&D. Third, based on the time profile of the simulated VECM estimate, we calculate the sum of discounted net gains for (i) additional private and public US R&D, and (ii) for policies reacting to foreign private and public R&D shocks with additional domestic private and public R&D. Additional private and public US R&D expenditures have very high internal rates of return and are profitable also in reaction to shocks from foreign R&D. All LATC reactions are transitional, suggesting semi-endogenous growth for the USA.