R&D Expenditures on Innovation: A Panel Cointegration Study of the E.U. Countries

Abstract

In academic discussions about how to achieve sustainable growth in the world, it is stated that this is not possible without spending on research and development and innovative activities so that countries can maintain their competitiveness in the global environment. The EU has defined strategies that consider innovation as a key element for stimulating growth and creatung employment. In this context, this study examines the relationship between R&D expenditures and the global innovation index in the scope of EU countries. A PVAR model and annual data from 2007 to 2020 were used for the relationship between research expenditures and growth in the innovation of EU countries. We first examined the cross-sectional and cross-country homogeneity of slopes. The second-generation unit root test was then applied using the Pesaran CIPS (2007) test, and the ARDL panel model was applied to test for cointegration. Causal analyses with the panel ARDL model and the error correction model were applied to determine the relationships of the variables and their direction. For the long-term dynamic effects between variables, an impulse response function (IRF) was used, and for the degree of the effect between R&D expenditures and the global innovation index, variance decomposition was used. The results of this paper reveal a long-term positive significant relationship between R&D spending and the global innovation index, whereas in the short-term, this relationship is negative. Furthermore, the causality results of the error correction ARDL model show unidirectional short-run and long-run causality from research and development to the global innovation index in EU countries. Finally, this paper enhances the understanding of the relationship between research and development spending and the global innovation index in EU countries.