Development Drivers and Limitations
Global Development Network series
Edited by Natalia Dinello and Shaoguang Wang
Chapter 6: Trade Liberalization and R & D Investment: Evidence from Manufacturing Firms in India
6. Trade Liberalization and R&D Investment: Evidence from Manufacturing Firms in India Mavannoor Parameswaran The issue of whether a more open trade policy regime accelerates technological progress and economic growth is highly debated in the economics literature. It has attracted even wider intellectual attention not only because of the increasing importance of trade in an economy, but also due to the ambiguity regarding which trade policy will generate faster technological progress. The theoretical models examining various ways trade can affect technological progress are informative, but they are not unanimous in their predictions. There are sound theoretical arguments supporting more liberalized trade, but there are also equally sound theoretical arguments for protecting some industries from international competition. Thus trade liberalization merits further empirical analysis (Hallak and Levinsohn 2004). A number of empirical studies have examined how trade openness affects technological progress and economic growth. This literature attempts to identify the empirical relationship between the degree of openness to international trade and a country’s economic performance, using standard econometric methods on country-level measures of specific variables. Although the preferred choice of variables and the exact econometric techniques employed have improved considerably over time, this literature has not produced a set of results which provides informed and convincing recommendations for trade policy. The indicators of openness used by these studies are either problematic as a measure of trade barriers or are highly correlated with other sources of poor economic performance. Furthermore, a liberal trade policy regime affects technological progress through a variety...
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