Intensity of Business Enterprise R&D Expenditure and High-Tech Specification in European Manufacturing Sector

Endogenous growth theories draw attention to technological innovation created within the research and development (R&D) activities to explain the productivity growth of new economies. Accordingly, this study attempts to identify the relationship between the business enterprise R&D expenditure and productivity growth via indicating the role of transformation in manufacturing sector towards high tech production. Thus, the hypothesis tested in this study is whether business enterprise R&D expenditure is a main determinant of high tech sectors of manufacturing. We examine the relationship between the intensity of business enterprise R&D expenditure and high technology specification in European countries based on a panel causality analysis performed by Generalized Method of Moments (GMM) for the annual data from 2000 to 2013. Empirical findings support that there is a strong causality from increasing business enterprise R&D intensity to the expanding share of high and medium-high manufacturing. Thus, our study concludes that business enterprise R&D expenditure is one of the main sources of improvement in the technological capability of high value-added production in Europe. The important policy implication of the results is that public policies should create an appropriate incentive for private R&D activities in order to provide a transformation in manufacturing sector towards high tech specification and continued growth in economy depending on innovation.