Sophistication gap between countries: The effect of research and development expenditure

Abstract

A recent strand of the literature suggests that economic sophistication is a strong predictor of economic development. Given that this branch of literature is relatively young, the determinants of economic sophistication have not yet been fully explored. This study contributes to this literature by examining the effect of research and development (R&D) investments on economic complexity. By applying a dynamic panel model to a panel of 67 countries, the following results are established: First, the results showed that research and development investments are associated with greater economic complexity. Second, when analyzing R&D by sector, the results highlight the importance of research spending by higher education, business, public sector and private non-profit sector in improving economic complexity. In the same vein, investments in different R&D activities, including basic research, applied research and experimental research, increase economic complexity. In addition, we provided evidence that R&D spending in several fields, including medicine, engineering, natural sciences, social sciences and arts, also increases economic complexity. Third, we further analyze the heterogeneity of the results, highlighting the role of natural resource endowment and income level. However, investments in research and development remain associated with higher levels of economic complexity in resource-poor countries in contrast to resource-rich countries, where they have no effect. Based on these results, policy implications were discussed.