As globalisation has become a global phenomenon and the world being said to be a global multicultural village, that is why many economies today have realised that going across their borders can place them to be in the world's competitive front (Fujimoto and Hartel, 2006). However, globalisation has made countries to enhance and strategise on good strategic dimensions (Porter, 1998) through engaging in international trade and enhancing trade patents via research and development (R&D) and innovation in order to maintain rapid and stable economic growth (Snowdon and Vane, 1997). Hence, MNCs found it imperative to expand across their borders thus operating subsidiaries in both developed and emerging economies at large.
History of trade dates back to over 100 years ago dating back to the era of barter trade (Samuelson and Nordhaus, 1998) which is trade of goods in exchange of goods. However, international trade can be defined as buying and selling of goods and services between two countries across their national borders (Lipsey and Chrystal, 1999). Similarly, Krugman and Obstfeld (2003, pp.8) defined international trade as transactions that involves "physical movement of goods or tangible commitment of economic resources'' between countries.
Seemingly, countries engaging in international trade are of the notion that transactions with other countries leads to rapid attainment of economic growth (Husted and Melvin, 2010). Thus, globalisation has opened the borders of countries encouraging flows of imports and exports between nations which is leading to evident rise in GDP across advanced nations (Snowdon and Vane, 1997). Consequently, sophistication becomes highly necessary given the rapid global technological advancement hence making countries to venture into R&D in order to come up with innovative ideas (Kim and Mauborgne, 1999) adding value to goods and services that would attract demand across borders. Although some economic theorists assume innovation as not favourable, FDI and trade transactions can in turn bring about flow of investment as well as knowledge transfer in the LDC (Lawler and Seddighi, 2001).
Thus, to establish a rational relationship between R&D, innovation, international trade and economic growth, secondary data/evidence using Switzerland as case study country will be analysed in order to draw inferences. Furthermore, given limited availability of data on case study country, global data will be used in some cases to analyse the case study country.
2.0 Theoretical Underpinnings on Growth and Trade.
2.1 Heckscher-Ohlin Model (Factor Proportion Theory/H-O Model)
This theory is of the stand that countries should indulge on productions of goods in relation to abundance of factors of production (Samuelson and Nordhaus, 1998). Seemingly, H-O model shows that "comparative advantage is influenced by the interaction between nations' resources (relative abundance of factors of production) and the technology of production (which influences the relative intensity with which different factors of production are used in the production of different goods) (Krugman and Obstfeld, 2003 pp.67).
Furthermore, the model emphasise that a country should focus on manufacturing products that will make them gain comparative advantage (Ohlin, 1933). Hence, countries should utilise their exports focusing on goods that have relative abundance of factor endowment, at the same time focusing on importing those product that have relatively scare resources (Lipsey and Chrystal, 1999).
2.2 Ricardian Model:
This model assumes that the purpose of international trade is in order to balance international differences in labour productivity (Krugman and Obstfeld, 2003). However, the model incorporates that free trade ensures beneficial trade-offs between nations. Thus, this model is quite vital as it goes in-depth showing the actual importance of international trade and how it globally impacts national welfare (ibid).
2.3 Product Cycle Theory (Vernon Model):
This model was developed by Raymond Vernon in response to the H-O model which thus expatiates the trends of international trade (Husted and Melvin, 2010). Similarly, the model shows how product life cycle, international trade and innovation interrelate (Grossman and Helpman, 1992). Seemingly, Vernon's theory shows that new products being produced in highly innovative countries are tested in the market place till their designs are perfected and standardised and products successful (Vernon, 1966).
However, once products are successful and patents runs out, market becomes open to other producers in the less advanced economies that have relative factor endowments and capacity to produce these products at a relatively lower cost gaining cost advantage over the original producers. In addition, this aids innovative firms to shift production location to these LDCs or NICs leading to market expansion/knowledge transfer and FDI to the production location (Seddighi and Lawler, 2001) resulting to intra-extra industry trade (Husted and Melvin, 2010). Thus, once the product reaches maturity stage and demand starts declining, producers hence need to come up with innovative ideas to upgrade the product or invent new products and continuously transferring knowledge and technology in the market (Finger, 2007).
2.4 Krugman Model (Innovation and Technology Transfer):
This model is a more developed version of Vernon's product cycle model. The model shows how R&D, innovation and knowledge transfer leads to market expansion. However, this model is of the assumption that technology transfer from advanced countries leads to foreign investment via international trade which is caused by demand of these goods from LDCs (Brezis, Krugman and Tsiddon, 1993) leading to endogenous growth in the leading nation (ibid).
Seemingly, Krugman's model viewpoint assumes that technological change/advancement leads to continuous innovations which in essence impacts wages of people in advanced nations and at the same time improving trade flows in the LDCs (Krugman, 1997) thus booming FDI in these countries.
2.5 Solow Growth Model:
This model is of the assumption that labour and capital leads to high productivity of goods which in turn leads to economic growth (Solow, 1994). In other words, the model had less emphasis on innovation and technology as factors that enhance economic growth instead correlated both factors as exogenous factors (Snowdon and Vane, 1997).
2.6 Romer Growth Model:
This model assumes that innovative ideas and technological advancement incorporated in productivity of goods for intra-extra industry trade leads to growth in an economy (Romer, 1994). However, Romer's model is an improvement of Solow model thus emphasising that innovative ideas and application makes a country gain an edge in today's very competitive global business environment (Romer in Barnett 1991).
3.0 Global Overview of R&D and Innovative Activities
Investment in R&D and innovative schemes is done greatly especially within the OECD countries which is all in effort to enhance and upgrade technological changes as regards knowledge creation that will help enhance production of goods and services for exports hence leading to growth in those nations (Loo and Soete, 1999). However, it is evident that OECD's investment in R&D increased significantly from $468 billion to $818 billion between 1996 and 2006 respectively making Gross Domestic Expenditure on R&D (GERD) to grow by 4.6 per cent annually between 1996-2001 which predicts a good trend of sustainable growth in global GDP (OECD Science and Technology Outlook, 2008).
Similarly, even the non-OECD countries invests highly on R&D activities thus; GERD in China amounted to $86.8 billion in 2006 increasing by 19 per cent annually in real terms between 2001-2006, while Russia's investment in R&D grew from $9 billion in 1996 to $20 billion in 2006 and from $1.6 billion to $3.7 billion between 1997 and 2005 respectively (ibid).
And total spending on R&D account for globally in the top three OECD terrain was 14 per cent for Japan, 24 per cent for EU 27 and 35 per cent for US.
Figure 1: Global R&D Trends between 1996-2006
Source: OECD Science and Technology Outlook, 2008.
Figure 2 further shows that R&D to GDP ration in OECD countries from 1996-2006 which depicts Switzerland as the sixth investor in R&D and the third amongst EU countries.
Figure 2: GERD Intensity by Country 1996, 2001 and 2000
Source: OECD Science and Technology Outlook, 2008.
Furthermore, that the fastest growing sectors as far as R&D is concerned are in the pharmaceuticals, software industry and technology hardware sectors. Table 1 shows that Switzerland is one of the top countries in the world dealing in pharmaceuticals, thus explains that the country's R&D spending is mainly streamlined to that sector which leads to the very stable growth in the country. In addition, it is evident that 52 per cent of exports in Switzerland are in chemicals and pharmaceutical products leading to obvious wealth creation and boost in the country's GDP.
Table 1: R&D Ranking for top Three sectors
(Source: http://www.innovation.gov.uk/rd_scoreboard)
P = Pharmaceuticals S = Software TH=Technology Hardware
4.0 Case Study Context
4.1 An Overview of Switzerland
Switzerland is a country located in Central Western Europe with a population of approximately 7.6 million people. However, the Swiss economy is characterised as one of the richest in the world with a considerable robust economy with stable GDP (Statistical Yearbook, 2009). Seemingly, Switzerland ranks number one in the world as regards local availability of R&D and training services, quality of science research institute, company spending on R&D, while it ranks second as regards university-industry collaboration in R&D and third as far as capacity innovation is concerned (World Economic Forum Report 2009/see appendix) and overall it ranks number one in global competitiveness (ibid).
However, given that Switzerland has a considerable stable GDP growth rate as seen in figure 3 below which indicates that GDP (PPP in international $) per capita rose from around $11,000 in 1980 to about $42,000 in 2008. In summary, GDP (US $ billion) equals 492.6 in 2008, GDP per capita equals 67, 384.5 and GDP (pp) as share per cent in the world totals to about 0.45 in 2008.
Figure 3: GDP growth rate from 1980-2008
Source: World Competitiveness Report, 2009
4.2 R&D and Innovative Activities and the Educational Sector in Switzerland
Educational Sector of this country is rated as one of the most efficient (World Competitiveness Report, 2009). According to report, the country has 47% tertiary enrolment spread across Switzerland's thirteen universities which shows a good percentage of educational achievement in upper secondary and higher education in 2008 as shown below.
Figure 4: Percentage of Educational Achievement in Switzerland.
Source: Switzerland Statistical Yearbook 2008
Thus, this excellent university system in the country is marked as one of the biggest spenders on R&D and thus ensuring efficient collaboration between educational and business entities which shows that a reputable amount of research translates into marketable goods for exports (Romer, 1994).
In other words, the high expenditure invested in R&D aids the country to enjoy a sustainable growth rate in the economy which is evident that the amount of expenditure spent on GDP as regards R&D rose from about 2.7% to 3% between 1986 to 2004 respectively as shown in figure 5 below.
Figure 5: R&D expenditure on GDP 1986-2004
Source: Switzerland Statistical Yearbook 2008
While total funding by the public on R&D by international standard ranks around 0.66% of worlds' GDP in 2004 (R&D Report, 2008). Furthermore, gross domestic expenditure (GDE) on basic research totals to about 28% which is higher than that of US (ibid).
Seemingly, it is reported that 26% of Switzerland's graduates gain degrees in the fields of sciences and engineering which is termed above OECD average (ibid). While according to another report, it is said that the countries graduates specialise mainly in these subjects thus; chemistry, physic and life sciences (www.eustatistics.gov.uk).
The figure below illustrates comparison of GDE on R&D between countries from 1991-2006 which shows that the Swiss R&D is improving over the years though at a slow progressive rate.
Figure 6: Comparison on R&D GDE between Countries
Source: OECD Science and Technology Outlook Report, 2008.
Consequently, the country's focus on R&D explains its high rank in innovation capacity as results of R&D are likely to translate to productivity of differentiated goods with patents filings thus making the country highly competitive. Hence, the figure below shows the science and innovation pattern in Switzerland where eight out of the eleven import and export innovative indicators ranks above average (OECD Science and Technology Outlook Report, 2008).
Figure 7: Swiss Economy Innovation Profile
Source: OECD Science and Technology Outlook Report, 2008
4.3 Switzerland's Exports
Switzerland engage in the production of goods that are labour intensive (Switzerland Statistical Yearbook, 2008) which is in line with the Ricardian model that emphasise that countries should leverage on the factor endowment it posses in order to gain comparative advantage (Venables, 1987). However, this is evident in the sense that the Swiss economy trades in labour intensive products for export such as pharmaceutical products and wrist watches and on the other hand imports capital intensive goods like automobiles and office machinery (Switzerland Statistical Yearbook, 2008).
Seemingly, as the worlds foreign trade becomes more sophisticated, Raymond Vernon came up with the product cycle model which incorporates knowledge creation (Finger, 2007). However, this explains high R&D investment in the pharmaceutical sector which proves that when the life cycle of a product reaches maturity stage and patents runs out and demands for products decline in advanced/parent country thus giving room for market penetration of the LDCs (Seddighi and Lawler, 2001). At this point, Krugman's modal come in where R&D personnel need to come up with innovative ideas to produce new products in order to maintain good and stable level of exports.
Figure 8: Exports of goods GDP by expenditure in Switzerland
Source: Switzerland Statistical Yearbook 2008
Figure 8 shows export of goods GDP by expenditure in Switzerland grew from 8.5% to 11.1% between 2004-2006 causing GDP per capita to rise from 2.4% to 4.4% between 2004-2006.
The table below shows Switzerland's trading partners and the country's main trading goods (imports and exports).
Figure 9: Switzerland Trading Partners and Trading goods in 2007
Source: Switzerland Statistical Yearbook, 2008
According to Swiss statistical data book, "Switzerland is in the league of countries whose foreign trade represents a very high proportion partners are the industrialized countries which accounted for of their GDP. Its major trading 77.9% of Swiss exports and 88.1% of its imports in 2007. Within this grouping, the EU plays a particularly important role(62.0% of exports and 79.5% of imports)'' (Swiss Statistical Yearbook 2008, pp. 529).
Thus, this validates Romer's growth model indicating that high level of innovation leads to high productivity of goods for exports, which reflects on growth of the country,'s GDP.
4.4 Linkages between Growth and International Trade
Foreign trade between nations leads to reputable growth in a country's economy GDP (Solow, 1994). As for the Swiss economy, international trade has lead the country to invest much on R&D and innovative activities which made the country rank number one in world competitiveness and also having one of the highest growth rate in the world (OECD Science, Technology and Industry Outlook, 2008).
With respect to this, the international trade statistics report shows that "growth of world GDP is associated with even higher growth in international trade (World Trade Statistics, 2009 pp.1) as shown in figure 10 below;
Figure 10: Growth and International Trade
Source: World Trade Statistics, 2009
Similarly, it is also evident from world statistics websites; Eurostat, BIS, OECD, WIPO, that countries that lowered their guards allowing free flow of trade (imports and exports) achieve a fair proportion in trade and growth (Grossman, et. al, 1991). Thus, investing in R&D as well as the education sector leads to transfer of knowledge in key sectors of the economy hence leading to high productivity which results to steady economic growth in such economies (Krugman, 1979: Romer, 1994).
In summary, high level of R&D and innovation enhances trade flows between nations and thus making such economies to grow.
5.0 Conclusion
Over the years, we have seen the world become smaller, not in terms of size but in terms of our perceptions towards it. We have seen nations interacting with others making attractive turnovers whilst transacting on international trade at opposite ends of the world seamlessly at the touch of a button. Transactions that had erstwhile not been possible without being there in person have now been eased due to improvements in technology and other similar developments. The world as we currently view it is a Global Village where nations can perform transactions, attend meetings, and attend classes by proxy, wherever they may be located in the world. This has been made possible with the aid of R&D and innovation for countries to produce goods that they have comparative advantage on and trade them with other nations that produce goods that the first country has less advantage to. This if properly channelled leads to steady flow of FDI to some countries thus aiding a reputable rate of growth in world economies which is why nations have set up business trade partners with presence in every continent on earth.
