The cosine-shaped pattern of innovations and technological advantages: Theory and evidence

Using data from 24 OECD countries, we find that the relationship between a country's R&D investment and technological advantage in a sector (measured by the country's labor productivity of the sector relative to the rest of the world) is non-monotonic. In particular, for countries whose technology levels are much lower or higher than the rest of the world in a sector, their sectoral R&D investment declines as their advantages in the sector improve; for counties with middle technology levels, the opposite is true. Extending the Eaton and Kortum framework, we develop a static model to theoretically analyze the relationship between R&D investment and technological advantages. We show that when the research efficiency in a sector is sufficiently elastic with respect to the sectoral technological advantage, a country's R&D investment increases with its technological advantage, and vice versa.