"The larger a country's exposure to the international economy, the more it gains from R and D activities in other countries."

Investing in research and development (R and D) and lowering barriers to trade and investment are cited routinely as two of the most effective ways to stimulate economic growth. The dilemma from a global perspective is that when it comes to R and D, almost all of it takes place in just a handful of industrialized countries, a fact that would seem to make attempts to lessen income disparities between industrialized and developing countries a monumental task.

But in R&D and Productivity: the International Connection (NBER Working Paper No. 6101), Research Associate Elhanan Helpman argues that a less-noticed benefit of liberalized trade is its potential to ferry the fruits of R and D --not just products, but productivity gains as well-- to a number of countries, thus reducing the impact of "skewed " R and D expenditures. "The larger a country's exposure to the international economy," Helpman writes, "the more it gains from R and D activities in other countries."

Helpman views technological innovation as a "major force" for increasing incomes in modern economies, mainly by boosting productivity. And he sees international trade as a way for countries to reap, on the cheap, the benefits of another nation's R and D. Helpman argues that some of these rewards accrue with "no special effort or investment." Such things as "manufacturing techniques and organizational methods," he writes, can be acquired from a trading partner "in the normal course of business."

There also is the simple fact , Helpman observes, that "international trade and investment provide opportunities for a deliberate effort to imitate foreign products and methods." While not a cost-free exercise, Helpman sees it as an effective means of technology transfer. "Some of the fastest growing economies have relied on it extensively, such as Japan in the immediate postwar era and the newly industrializing countries in East Asia more recently," he writes. Given the many economic benefits already linked to foreign trade and investment, Helpman points out that their ability to distribute productivity gains "driven by R and D make them all the more important."

"This means that we have reasons to be optimistic about recent trends towards a tighter integration of national economies," he writes. "And it means that technological developments in industrialized countries that have been perceived by many to be detrimental to the developing countries may in fact be good for them after all."

The Digest is not copyrighted and may be reproduced freely with appropriate attribution of source.

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