Technological competition and trade performance

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Abstract
This paper estimates a demand system for OECD exports differentiated by country of origin for two ISIC industries (non-electrical machinery, electrical machinery) and for total manufacturing exports. It develops a generalized form of the AIDS demand system in which research and development (R&D) effort enters in a number of ways to affect a particular supplier's competitiveness: R&D activity relative to competitors affects, on the one hand, relative cost competitiveness and, on the other hand, the producer's position in the quality spectrum of products offered on international markets. One of the interesting insights gained from the study is that 'effectiveness' of R&D effort can differ much across different economies. It is conjectured that a country's position in an international catching-up process may be partly responsible for such differences as well as labour market dynamics which link increased labour costs to cost- and quality-improvements.

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