Abstract: Investment in research and development (R\&D) affects a country’s total factor productivity. Recently new theories of economic growth have emphasized this link and have also identified a number of channels through which a country’s R\&D affects total factor productivity of its trade partners. Following these theoretical developments we estimate the effects of a country’s R\&D capital stock and the R\&D capital stocks of its trade partners on the country’s total factor productivity. We find large effects of both domestic and foreign R\&D capital stocks on total factor productivity. The foreign R\&D capital stocks have particularly large effects on the smaller countries in our sample (that consists of 22 countries). Moreover, we find that about one-quarter of the worldwide benefits of investment in R\&D in the seven largest economies are appropriated by their trade partners.