Does research and development capital affect total factor productivity? Evidence from Greece

The purpose of this study is twofold: Firstly, it investigates the relationship between the research and development (R&D) capital and the total factor productivity (TFP) of the Greek economy over the period 1981–2007. Secondly, it presents an overview of relevant empirical studies. It applies the Johansen methodology to estimate cointegrating vectors and uses vector error correction models to examine causality and short-term dynamics. The results indicate the presence of a long-run relationship between the total R&D capital and TFP and between the public R&D capital and TFP. On the other hand, the private R&D capital is not significantly related to TFP. A 1% increase in total R&D capital raises TFP by 0.038%, whereas a 1% increase in the public R&D capital raises TFP by 0.075%. The productivity of the Greek economy could be enhanced by higher R&D expenditure combined with the necessary structural reforms to improve the efficiency of the innovation system.