International R&D Spillovers Between U.S. and Japanese R&D Intensive Sectors

A great deal of empirical evidence shows that a country's production structure and productivity growth depend on its own R&D capital formation. With the growing role of international trade, foreign investment and international knowledge diffusion, domestic production and productivity also depend on the R&D activities of other countries. The purpose of this paper is to empirically investigate the bilateral link between the U.S. and Japanese economies in terms of how R&D capital formation in one country affects the production structure, physical and R&D capital accumulation, and productivity growth in the other country. We find that production processes become less labor intensive as international R&D spillovers grow. In the short-run, R&D intensity is complementary to the international spillover. This relationship persists in the long-run for the U.S., but the Japanese decrease their own R&D intensity. U.S. R&D capital accounts for 60% of Japanese total factor productivity growth, while Japanese R&D capital contributes 20% to U.S. productivity gains. International spillovers cause social rates of return to be about four times the private returns.