Knowledge Spillovers, Absorptive Capacity and Growth: An Industry-level Analysis for OECD Countries

Given the decline in growth momentum in the manufacturing sector in many OECD countries, the role of knowledge-based capital has emerged as a key driver for sustained growth. While empirical studies on estimating knowledge spillovers have usually been undertaken at the country level, the spillover effects can be more definitive only if the analysis is conducted at the industry-level. The effectiveness of international spillovers is conditional on recipient country’s absorptive capacity and this is an important component of the spillover mechanism that has not attracted significant attention so far. This paper therefore assesses the effect of spillovers in driving per capita output growth taking into account the role of absorptive capacity. Our main findings are first, the confirmation of the robust positive relationship between human capital and output growth for 14 OECD countries at industry level. Second, the gains from international spillover are conditional to the level of human capital and the degree of protection of intellectual property rights. Third, countries that improve absorptive capacity can potentially increase gains from spillovers via either trade or FDI (including vertical FDI). Finally, significant heterogeneity is found between high and low-tech industries. The former group is more effective in absorbing spillovers while the latter has failed to reach the critical level of technological advancement in order to absorb foreign and domestic knowledge.