Intellectual Property Rights, FDI, R&D and Economic Growth: A Cross‐country Empirical Analysis

• Published date: 01 July 2016
• DOI: http://doi.org/10.1111/twec.12304
• Author: Wen‐Hsien Liu
• Date: 01 July 2016

Intellectual Property Rights, FDI, R&D

and Economic Growth: A Cross-country

Empirical Analysis

Wen-Hsien Liu

Department of Economics, Institute of International Economics,

National Chung Cheng University, Min-Hsiung, Taiwan

1. INTRODUCTION

ROMER (1990), Grossman and Helpman (1991) and Aghion and Howitt (1992) all

address the importance of technological progress as a key determinant of long-run econ-

omic growth. They believe that technological progress can be attributed to a firm’s profit-

maximisation behaviour in which enormous profits are generated by consistently introducing

new products or improving existing ones. Firms are willing to conduct innovative activities

because they expect to profit from their inventions which are protected by intellectual prop-

erty rights (IPRs). Therefore, economic growth that depends on innovation is likely to be

boosted by IPRs protection. However, there is limited literature that directly tests whether

stronger IPRs protection is likely to result in higher economic growth. Whether strengthening

the IPRs regime can enhance economic growth still needs more comprehensive and persuasive

cross-country empirical evidence.

This paper is intended to fill in this lacuna of the present research by exploring how IPRs,

research and development (R&D) and foreign direct investment (FDI), along with other possi-

ble variables, may affect the economic growth of the host country. Using a longer time series

(38 years) and more cross-sections (92 countries), this paper contributes to the literature by

providing more comprehensive empirical evidence than previous studies on the relationship of

economic growth and its explanatory variables. In addition, this paper uses the newly devel-

oped system generalised method of moments (system GMM) methodology to solve the poten-

tial endogeneity problem. Thus, the results from this paper are believed to be more trustworthy

than previous studies that ignore endogeneity. I finally conclude from the analysis that domes-

tic investment share, FDI, R&D capacity, openness to trade, human capital investment and

IPRs protection all have statistically significant and positive impacts on economic growth for

the full sample of countries. A further investigation of countries at different levels of develop-

ment suggests two major findings. First, besides domestic investment, openness, human capital

and IPRs protection, R&D is the key to drive economic growth in the higher-income countries,

while FDI is the engine of growth in both the higher-income and the middle-income countries.

Second, a positive and statistically significant impact of IPRs protection on economic growth

I would like to thank the editor, David Greenaway, two anonymous referees and conference participants

at the 2009 Symposium on R&D and Innovation (National Taiwan University) for their valuable com-

ments and incisive suggestions which helped to improve the paper substantially. Financial support from

the Ministry of Science and Technology (formerly National Science Council) of Taiwan (grant number:

NSC-96-2415-H-194-007) is also gratefully acknowledged. The usual disclaimer applies.

©2015 John Wiley & Sons Ltd 983

The World Economy (2016)

doi: 10.1111/twec.12304

The World Economy

is found in both higher-income and lower-income countries. But for the middle-income coun-

tries, no significant relationship between IPRs protection and growth appears to exist.

The remainder of this paper is organised as follows. Section 2 provides a review of the lit-

erature. Section 3 introduces the data and empirical model used in this paper. The empirical

results are reported and discussed in Section 4, while Section 5 concludes the paper.

2. LITERATURE BACKGROUND

a. R&D, Technological Progress and Economic Growth

In the past two decades, economists have focused on how endogenous technological pro-

gress may influence the patterns of economic growth. In the so-called endogenous R&D-dri-

ven growth models pioneered by Romer (1986), technological progress (usually phased in

terms of growth of total factor productivity, TFP growth) is generated by utilising human cap-

ital and the obtainable knowledge stock. It is then applied to the production process and

results in everlasting increases in the growth rate of output (economic growth). Jones (1995)

first employed the time series trends of TFP growth and the growth rate of the numbers of

scientists and engineers in the United States, Germany, Japan and France to examine the

soundness of the R&D-driven growth model. Yet, he did not find evidence that these variables

are positively linked. For this contradicting result, Aghion and Howitt (1998) provide some

elucidations and argue that in lieu of the number of scientists and engineers, R&D investment

as a percentage of GDP should be used to take into account the country-size effect. Several

subsequent studies present solid evidence that R&D investment is positively related to TFP

growth in the United States (Scherer, 1982; Griliches and Lichtenberg, 1984; Zachariadis,

2003). This positive relationship has also been verified by other studies applying international

data (Frantzen, 2000; Griffith et al., 2004).

b. FDI, Knowledge Diffusion and Economic Growth

The diffusion of knowledge is often considered as a major source of technological progress

and productivity growth. Romer (1986), Lucas (1988, 1993) and Grossman and Helpman

(1991) all ascertain that knowledge diffusion is an important mechanism underlying endoge-

nous economic growth. Meanwhile, foreign direct investment (FDI), in addition to interna-

tional trade, was considered as a critical channel for knowledge diffusion long before the

introduction of R&D-driven growth models around 1990. For instance, Romer (1990) under-

lines the role of FDI on filling the technology gap between developed and developing coun-

tries. He asserts that a country’s growth is closely related to its utilisation of knowledge

embodied in FDI as well as the formation of physical and human capital. In general, multina-

tional corporations (MNCs) are believed to have a strong dedication to employee training. In

other words, MNCs may provide a direct and positive impact on boosting local economic

growth through human resource development. Nevertheless, Caves (1974) has emphasised

three potential spillover benefits as indirect gains of FDI in addition to the above direct bene-

fit. Among these potential benefits, the most important one from the standpoint of developing

countries is the diffusion of knowledge to local firms. In particular, FDI can facilitate the pro-

cess of knowledge diffusion not only directly through the training of suppliers, but also indi-

rectly through labour mobility and imitation.

©2015 John Wiley & Sons Ltd

984 W.-H. LIU