International Trade, Knowledge Spillover and Total Factor Productivity in Iran

Recent theories of economic growth indicate that international trade improves not only the level of total factor productivity but also it enhances the growth rate of total factor productivity. More specifically, Developing countries grow by expanding its trade with developed countries.The purpose of this paper is to investigate knowledge spillover effect through international trade. Panel data approach is employed to model major sectors of the Iranian economy and estimate empirical relationship among variables included in the model using the data over the period 1996-2005.The findings of the study show that domestic research and development (R&D) and sectoral imports increase total factor productivity in Iran. Moreover, the foreign direct investment (FDI) and human capital have positive and significant effect on total factor productivity.