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Abstract

This paper examines the effects of tariff reductions endorsed under GATT-WTO and AFTA-CEPT on R&D expenditures of Philippine manufacturing firms. It also considers firm characteristics like exports, capital intensity, and size as explanatory factors. Using pooled firm-level data that are harmonized with the international nomenclatures for traded products, the results uphold that intensified competition from foreign players drive domestic firms to develop their production processes and products. Accordingly, the main findings of the paper reveal that reductions in MFN and ASEAN tariffs increase the growth rate of R&D within manufacturing firms. Likewise, a rising export share is associated with higher R&D growth rate and this is suggestive of how export profits further incentivizes firm innovation. The findings also link capital intensity and firm size to higher R&D growth rate. Overall, the results provide support for the role of tariff changes as conduits through which trade liberalization influences expenditure decisions of manufacturing firms.

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