Does Domestic and Foreign R&D Capital Affect Total Factor Productivity? Evidence from Eurozone Countries

The purpose of this study is to empirically investigate the impact of domestic and foreign R&D capital on TFP in the Eurozone countries over the period 1995-2016. The variations in the TFP level for each country are explained by the changes in both the domestic and foreign R&D capital. Total domestic R&D capital is divided into three sectors, namely business, public and higher education. This specification allows to explore the role of certain variables in the long-run evolution of TFP in Eurozone countries. The results indicate that all variables of R&D capital have a positive contribution to TFP. Foreign R&D capital appears to have higher contribution to the TFP level than domestic R&D capital in all estimations and specifications. The impact of higher education R&D capital is larger than that of the business and public. The estimations are related to the productivity slowdown, especially over the period of economic crisis, and the high degree of differences in income per capita and productivity levels among the Eurozone member states. The results point to the need for policy actions to increase the available domestic R&D capital in all countries and improve the technology diffusion among them within the Eurozone.