Trade Openness, Knowledge Spillovers and Economic Growth: An Empirical Study of Pakistan, India and Sri Lanka
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Abstract
This study investigates the linkages between trade openness, R&D spending and economic growth in the three SAARC countries, namely; India, Pakistan and Sri Lanka. The simultaneous model based on two equations is constructed. In one of the equations public R&D is used as a dependent variable and in the other equation it is used as an independent variable to explain the growth rate which is taken as a dependent variable. The study then employs 2SLS technique to capture the fixed and the random effects. Later, the choice of either the test is done statistically through the Hausman test making a conclusion. The data is taken from 1991-2022. The study aimed to investigate the chain effect starting from trade integration that generates new knowledge and innovation and later that to what extent this innovation (proxied by public R&D expenditure) boosts the economic growth. Beside these endogenous variables, some of the control variables are also used to explain the variation in the regression equations. From the results of the empirical analysis the study draws three main conclusions. One that trade openness holds a positive relationship with public R&D spending. Second, public R&D spending also fosters economic growth, hence a bi-directional causal link is found between the two variables. Third, human capital and physical capital are significant and positively linked to the public research and development investments, while labor force participation, manufacturing (value added production) sector and physical capital are positive and significantly impact the GDP growth rate.