Do indigenous or foreign innovation efforts matter for the middle-income economies transition to the higher-income rank? An empirical evidence

ABSTRACT

This study analyzes whether indigenous or foreign innovation efforts are more important for the transition of middle-income economies to the higher-income rank. Data on 61 countries in both lower middle-income and upper middle-income categories between 1980 and 2018 are used. Discrete-time hazard models are employed. The unobserved heterogeneity is controlled in the estimations to improve the continuous-time hazard model applied in existing studies on innovation at the national level. Results show that foreign sources of innovation measured by nonresident patents and international R&D spillovers through the FDI channel are more important for the lower middle-income group to move up the income ladder. For the upper middle-income group, domestic source of innovation measured by R&D capital stock is the most important, followed by foreign innovation diffused through the import channel. Institutional quality supports the upper middle-income economies to obtain the high-income rank.

KEYWORDS:

• Middle-income economies
• innovation effort
• R&D spillovers
• international transfer of technology
• discrete-time hazard model

Acknowledgements

The author is thankful to Professor Atsushi Kato for his guidance and constructive comments on previous drafts of this paper.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 Initial value of R&D stock is calculated as $R\mathrm{\&}{D}_S^t={\displaystyle \frac{R\mathrm{\&}{D}_{\exp }^t}{(\delta +g)}}$; R&D expenditure of the first year is denoted as $R\mathrm{\&}{D}_{\exp }^t$; given average annual growth rate of the R&D expenditures g (Griliches 1979).

2 Existing studies use depreciation rates between 5% and 20%.

3 Initial value of the stock of patent applications is similar to the stock of R&D capital.

4 Data on FDI and imports of goods and services bilaterally from TRIAD between 1995 and 2018 are from UNCTAD, data before 1995 are from UN Comtrade database.

5 Belgium, Denmark, Germany, Ireland, Greece, Spain, France, Italy, Luxembourg, Netherlands, Portugal, United Kingdom.

6 Under this index, there are five areas of (1) size of government, (2) legal structure and property rights, (3) access to sound money, (4) freedom to trade internationally, and (5) regulation of credit, labor, and business.

7 Events that have the same value of survival time.

8 Cloglog link function: cloglog(x) = log (-log(1-x)).

9 Hess and Persson (2012) incorporate into log-likelihood function the binary dependent variable y_ik (value one if the country exits at the end of the observation period and value zero otherwise) as follows: Log-likelihood =  $\sum _{i=1}^n\sum _{k=1}^{max}[y_{it}^{}\log h_{ik}^{}+(1-y_{ik}^{})\log h_{ik}^{}]$.

10 Additional estimations to confirm the robustness of results are made with only inward FDI stock and nonresident patent stock as independent variables, no control variables included. Similar results were obtained at the 90% confidence level with coefficients of 0.621 for nonresident patent stock, and 0.3499 for FDI stock.

11 Estimation with R&D capital stock and import-embodied international R&D capital was conducted separately, with no control variables included. Similar results were obtained at the 95% confidence level with coefficients of 1.421 for domestic R&D capital stock, and 1.043 for import-embodied foreign innovation.