International trade and foreign direct investment (FDI) are both considered as channels through which knowledge stock can be transferred across countries. For example, Coe and Helpman (1995) find that Research and Development (R&D) stock transferred among 21 OECD countries plus Israel have a positive and significant effect on domestic country’s total factor productivity. Similarly, FDI has long been considered a vehicle of transferring not only physical capital, but also intangible assets such as advanced technology or better product designs from one country to another. Researchers note that the knowledge stock transferred through FDI affects the host country’s productivity positively.  

In this paper, we study how foreign knowledge stock can affect the domestic country’s technical efficiency based on data from 47 countries over the period of 1989-2002. Our sample includes 20 developed OECD countries (OECD20) and 27 developing countries (LDCs). Following Coe and Helpman (1995) and the existing literature, R&D stock is taken as a measure of knowledge stock. We consider the OECD20 as the source of international knowledge stock in our sample because most R&D is conducted by industrial countries. For every country in our sample, two measures of foreign R&D stock are constructed -- R&D stock transferred into a country through imports and R&D stock transferred into a country through inward FDI. We apply a stochastic frontier model to determine a country’s position relative to its technology frontier. We study how R&D transferred through trade and FDI among OECD20 and from OECD20 to LDCs affect the recipient country’s technical efficiency. Our results indicate that foreign R&D has a positive impact on technical efficiency. And this effect is larger in OECD20 relative to the effect in LDCs.