Competing internationally: On the Importance of R&D for Export Activity

Export is an important factor for growth and welfare for small, open economies. Since R&D and innovation are also key factors of growth for an industrialized economy, it is interesting to analyze the relationship between R&D and export for Belgium as one example of a small, open and industrialized economy. Because of possible endogeneity of R&D, we instrument R&D with information on subsidized R&D projects. Consequently, it can be indirectly identified whether R&D subsidies may serve as policy tool for stimulating exports. Due to the exceptionally high openness of Belgium, and the consequential high presence of multinational enterprises (MNEs), we consider two subsamples of firms, purely domestic firms and MNEs. Differences in the relationship between R&D and exports may occur between domestic firms and MNEs due to intra-group transfers and possible centralization of R&D activity in MNEs in a certain geographical area. For the analysis, we use data from the Flemish Community Innovation Survey (CIS) 2005 and 2007. Results indicate that there is a positive effect of R&D on exports for the full sample as well as for both subsamples. Due to possible endogeneity of R&D, we instrument R&D with data on the lagged number of subsidized R&D projects and the lagged average size of the subsidized R&D projects. Results of this analysis indicate that R&D subsidies increase R&D. This is reassuring for policy makers: first, subsidies lead to more R&D in the economy and, second, R&D increases the international sales of firms. As this is also the case for MNEs, the concern that R&D subsidies may lead to more R&D in the economy, but in case of MNEs to no further benefits as production may take place elsewhere, is reduced. However, there is some evidence that the export stimulus resulting from R&D is smaller for MNEs than for domestic companies.

Czarnitzki, Dirk and Annelies Wastyn (2010), Competing internationally: On the Importance of R&D for Export Activity, ZEW Discussion Paper No. 10-071, Mannheim.