Does research and development capital affect total factor productivity? Evidence from Greece

The purpose of this study is twofold: Firstly, it investigates the relationship between the research and development (R&D) capital and the total factor productivity (TFP) of the Greek economy over the period 1981-2007. Secondly, it presents an overview of relevant empirical studies. It applies the Johansen methodology to estimate cointegrating vectors and uses vector error correction models to examine causality and short-term dynamics. The results indicate the presence of a long-run relationship between the total R&D capital and TFP and between the public R&D capital and TFP. On the other hand, the private R&D capital is not significantly related to TFP. A 1% increase in total R&D capital raises TFP by 0.038%, whereas a 1% increase in the public R&D capital raises TFP by 0.075%. The productivity of the Greek economy could be enhanced by higher R&D expenditure combined with the necessary structural reforms to improve the efficiency of the innovation system.