1. Discussion of Francisco Moris’ U.S. International Trade in R&D- Related Services and a Transactions-Based Profile of Business R&D’ Wolfgang Keller, University of Colorado and NBER

2. Overview Shows recent trends in US trade in research, development, and testing (RDT) services Develops a new methodology, transactions-based R&D accounting, for tracking international R&D that emphasizes ‘use’ of R&D results Applies the new framework to 2003 US data from NSF and BEA

3. Why is this important? Because the US trade surplus in RDT services is primarily due to exports by foreign-owned multinational affiliates ? New indicators on how new technology is used and diffused internationally for current levels of integration R&D creates new technology, thereby raising productivity – and that is the critical determinant of per-capita income

4. Sources of Income Differences  Production function: Y = A*F(K,H,L) Two ways of raising output: 1.Higher effort and investment –More hours worked: ΔL –More investment: ΔK, ΔH 2.Higher efficiency –More output for given L, K, and H: ΔA

5. Output Differences: the Breakdown Typical example: U.S. output per worker in the year 1985 is 35 times as large as that of Niger Output per Worker difference Capital difference 1.5 x Human capital difference 3.1 x Productivity difference 7.7 = Total Source: Hall and Jones 1999 35

6. But: not much is known yet about the ‘A’ factor Typically, what we know is –Not based on data, but on constructed or otherwise estimated data –Only correlations of observables with the constructed ‘A’ factor Some indications that ‘A’ is affected by technology activity both at home and abroad There is a great need to measure and quantify technology creation and linkages

7. Three R&D accounting perspectives Performance Funding Use

8. Research, Development, and Testing Services

9. US: trade surplus in Business, Professional, and Technical Services (BPT) and RDT Services

10. But: trade deficit in unaffiliated RDT since 2003

11. US is net exporter of RDT largely through affiliated trade… Total Unaffiliated Affiliated Millions of current $ US

12. And that comes largely from foreign-owned affiliates to their multinational parents

13. US RDT trade surplus through exports by foreign-owned affiliates –does this matter? Quantitatively, how large are these net technology transfers from the US to other countries? –Not that large: 1.5% of US BERD in 2003 Are there policy implications for the US? Technology sourcing, ‘Listening-post FDI’ –van Reenen et al., forthcoming American Economic Review International technology linkages go both ways. FDI coming into the US has a major positive effect on US firm productivity –Keller and Yeaple (2005)

14. Who is the ultimate beneficiary of US R&D? Current R&D expenditure statistics focus on two dimensions (Frascati Manual) –R&D Performer –R&D Funder System of National Accounts - based statistics would consider the R&D ‘user’ If market transactions on R&D services are observed, we know their value, not only the costs of R&D

15. Relation to new US R&D Satellite Accounts Frascati Manual (FM)SNA R&D expenditures -Exports of RDT -Imports of RDT Output Exports and imports of R&D output Capital formation See Robbins (2006)

16. The three faces of R&D Funding Use/Exchange Production R&D

17. Table 4: A New Transactions View of R&D Transactions 2 to 5 are market-based

18. R&D in the closed economy Gross Expend. R&D used Note: [2] = [4], [3] = [5]

19. Trade in R&D services in open economy R&D service exports of one country are the R&D service imports of another: [2] + [3] = [4’] + [5’] (assumes no intra- country R&D trade)

20. Application to 2003 US Business R&D [1]+[6] +[2]+[3] [1]+[6]+[4]+[5] Units: Billion current $ US

21. Initial questions: domestic R&D trade In which industries is there a lot of R&D service trade? What are the characteristics of firms that buy and sell R&D services domestically? How large are R&D purchases and sales, relative to own-account R&D in the closed economy?

22. International R&D service trade What are the characteristics of firms that export or import R&D services? With which other countries? Does R&D service trade decline with distance, domestically as well as internationally, like most other trade does?

23. Technology diffusion: market-based and non- market based

24. US technology imports in 2001

25. Why look at Multinationals: FDI and the Internalization Question Internalization : The hierarchical structure between MNE parent and affiliate overcomes market failures – internalize externalities--in the market for technological knowledge -> that is a motive for FDI, versus technology sale or licensing

26. Studying technology diffusion inside and outside the MNE Comparing RDT service trade between –affiliated and –unaffiliated parties Are there systematic differences in these patterns? If so, does transfer pricing play a role? To the extent that it does not, what accounts for the systematic differences?

27. Conclusion The paper provides the methodological basis for new research on technology linkages between countries –Will improve understanding of international technology diffusion & income differences Current efforts should also put emphasis on royalty and licensing payments And: how can a more informed analysis of market-based linkages shed new light also on spillover relations?

28. US affiliated trade in RDT, 2001-2003