Working Paper Series

R&D Spending and M&E Investment in Canadian Manufacturing

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Abstract

This paper elaborates a Vector Error Correction Model (VECM) in order to explore the causal relationship between R&D expenditure and M&E investment, and between these two variables and the skills. Within the same framework, we also investigate for other determinants of R&D and M&E. Thus, using data on Canadian manufacturing industries, the main empirical findings sum up as follows. First, we find evidence that R&D expenditure and M&E investment positively induce (Granger-cause) each other in the long run; but in the short run the causality occurs negatively in both ways, possibly due to resource constraints. Second, we find that the skills is a key determinant of both R&D and M&E in the long run, and in the short run it also positively causes R&D. Further, there exists a positive long-run feed back from M&E to skills. Finally, we also find evidence that GDP, competition, real exchange rates, and M&E capital depreciation seem to be other important determinants of R&D and M&E over time.