Engines of growth. Innovation and productivity in industry groups

The diversity of technological activities that contribute to growth in labour productivity is examined in this article for manufacturing and services industries in eight major EU countries. We test the relevance of two “engines of growth”, i.e., the strategies of technological competitiveness (based on innovation in products and markets) and cost competitiveness (relying on innovation in processes and machinery) and their impact on economic performance. We propose models for the determinants of changes in labour productivity and we carry out empirical tests for both the whole economy and for the four Revised Pavitt classes that group manufacturing and services industries with distinct patterns of innovation. Tests are carried out by pooling industries, countries and three time periods, using innovation survey data from CIS 2, 3 and 4, linked to economic variables. The results confirm the specificity of the two “engines of growth”; economic performances in European industries appear as the result of different innovation models, with strong specificities of the four Revised Pavitt classes.     

A nonsmooth, nonconvex model of optimal growth

This paper analyzes the nature of economic dynamics in a one-sector optimal growth model in which the technology is generally nonconvex, nondifferentiable, and discontinuous. The model also allows for irreversible investment and unbounded growth. We develop various tools to overcome the technical difficulties posed by the generality of the model. We provide sufficient conditions for optimal paths to be bounded, to converge to zero, to be bounded away from zero, and to grow unboundedly. We also show that under certain conditions, if the discount factor is close to 1, any optimal path from a given initial capital stock converges to a small neighborhood of the golden rule capital stock, at which sustainable consumption is maximized. If it is maximized at infinity, then as the discount factor approaches 1, any optimal path either grows unboundedly or converges to an arbitrarily large capital stock.     

Dynamic analysis of patent policy in an endogenous growth model

In this paper, we explore the dynamic properties of an endogenous growth model with finite patent length. We show that there exists a unique equilibrium growth path and that this path exhibits damped oscillations in contrast to the equilibrium path of an endogenous growth model with infinite patent length. We also examine the effects of patent policy on social welfare and show that infinite patent length does not maximize social welfare. Furthermore, we show that, in a growth model that does not exhibit scale effects, a finite patent length maximizes social welfare on the balanced growth path.     

Costly investment, complementarities and the skill premium

We propose a new framework to analyse the relationship between the relative high-skilled labour endowment, the skill premium and economic growth. Building on Acemoglu and Zilibotti (2001), we introduce physical capital; internal costly investment in both capital and R&D; and complementarities between intermediate goods. We only find a positive relationship between the relative labour endowment and both the skill premium and economic growth within determined intervals of relative labour endowment values, which vary with the absolute productive advantage of high over low-skilled labour. The model thus accommodates theoretically mixed empirical results on the relative labour endowment-skill premium relationship. We further find that the impact on both the relative labour endowment and the skill premium of a rise in investment costs or in the complementarities degree depends on: (i) the absolute productivity advantage of high over low-skilled labour; and (ii) the relative labour endowment.     

Endogenous technological progress in a multi-sector growth model

This paper presents an endogenous growth model driven by human capital, where human capital can be allocated across three sectors: the production of the final consumption good, the educational sector and the production of technological capital (in the form of knowledge or ideas). In our model, which also includes public expenditure and population growth, labor augmenting technical progress is endogenous and this enriches the transitional dynamics of the economy. With respect to ideas-based growth models, we assume knowledge is produced according to a neoclassical technology, combining ideas and human capital. Such an assumption is motivated by empirical works showing the existence of significant decreasing returns in the creation of ideas at the aggregate level (as Kortum, 1993; and Pessoa, 2005) and of the weak relationship between some inputs of the knowledge production process (as the number of researchers) and the total factor productivity growth rate (as Jones, 2002). Under some general conditions, this economy exhibits the existence of a steady state equilibrium and an unstable multidimensional manifold. Numerical examples are provided to show the existence of stable arms.     

Swedish economic growth and education since 1800

Abstract.  The contribution of this paper is twofold. First, it builds and makes use of long-run data from Sweden on formal education that have never been used to date. Second, it provides a quantitative application of recent theoretical work on the link between demographic changes and economic growth through their effect on education. It concludes that changes in longevity may account for as much as 20% of the observed rise in education over the period from 1800–2000 via a horizon effect, but have little impact on income growth over the period. On the contrary, changes in population density and composition are central, mainly thanks to their effect on productivity. Most income growth over this period would not have materialized if demographic variables had stayed constant since 1800.     

TRIPs, trade and growth: When comparative advantages break down

In this paper we combine a model of Ricardian comparative advantages as in Dornbusch et al. (1977) with Grossman and Helpman's (1991) quality ladder model and derive the consequences of asymmetric IPRs protection for the pattern of trade and the world rate of growth through innovation. Our analysis differs from that already made by Taylor (1994) in that final goods and research technologies do not go exactly along together, so the impossibility of doing licensing under asymmetric protection will here bring forth an infringement of comparative advantages which we call “the invasion effect”.     

Liquidity risk, economic development, and the effects of monetary policy

Empirical evidence indicates that monetary policy is not super-neutral in many countries. In particular, in high inflation economies, inflation is negatively related to economic activity. By comparison, inflation may be positively correlated with output in low inflation countries. We present a neoclassical growth model with money in which the incidence of liquidity risk is inversely related to aggregate capital formation. Interestingly, there may be multiple monetary steady-states where the effects of monetary policy vary. In poor economies, the financial system is highly distorted and higher rates of money growth are associated with less capital formation. In contrast, in advanced economies, a Tobin effect is observed. Since inflation exacerbates distortions from a coordination failure in the low-capital steady-state, individuals become much more exposed to liquidity risk. Consequently, optimal monetary policy depends on the level of development.     

On the role of intentionality in evolutionary economic change

One important challenge to evolutionary economics consists of tackling the paradoxical relationship between purposeful human action and the ‘blindness’ of evolutionary processes. We argue that the theoretical treatment of intended action is a prerequisite for venturing beyond the phenomenological explanation of evolutionary processes. If so, evolutionary processes are not (at least completely) ‘blind’. Of course, not every change in a society is a consequence of purposeful action. However, even if not every action were intended and not every novelty were the consequence of pursuing particular goals, the evolution of individual intentions and pursued goals (micro-level) is a key process in explaining economic change. In this context, an evolutionary efficiency criterion is proposed.     

Stochastic growth: a duality approach

We re-examine the representative agent's optimal consumption and savings under uncertainty in the presence of investment constraints using martingale representation and convex analysis techniques. This framework allows us to explicitly quantify precautionary savings which induces a higher average growth rate than in a certainty setup. We provide a closed form solution for a Cobb-Douglas economy. The effect of uncertainty on portfolio selection is analyzed. Consumption growth rate and risk free interest rate exhibit a U-shaped relationship. Uncertainty negatively affects expected consumption growth rate; such a result seems to be supported by empirical evidence.     

Product market competition,R&D composition and growth

We revisit the relation between product market competition and leading-edge growth in a model where horizontal and vertical innovations simultaneously occur. We show that competition exerts an important effect on the composition of aggregate R&D (vertical versus horizontal). In fact, when product market competition gets more intense, a larger fraction of R&D is engaged in improving the quality of products; this occurs at the expense of a lower rate of horizontal innovation. This effect, which is absent in the basic endogenous growth model with only vertical innovations, may overturn the inverse relation between product market competition and leading-edge growth found in prior theoretical models.     

Mark-ups, economies of scale and the role of knowledge spillovers in OECD industries

Using R&D-based models of economic growth as a foundation, this paper argues that market-driven knowledge creation is necessarily linked as an engine of productivity growth to economies of scale and market-power. A cost function and factor demand model is applied to a cross-country industry data set to study market-power, economies of scale and the role of knowledge in an integrated approach. Empirical results reveal the presence of market-power and economies of scale in all of the industries investigated. R&D and spillovers explain some of the productivity growth observed. Spillovers are identified as an external source of economies of scale.     

Political versus economic institutions in the growth process

After a decade of research on the relationship between institutions and growth, there is no consensus about the exact way in which these two variables interact. In this paper we re-examine the role that institutions play in the growth process using data for developed and developing economies over the period 1975–2005. Our results indicate that the data is best described by an econometric model with two growth regimes. Political institutions are the key determinant of which regime an economy belongs to, while economic institutions have a direct impact on growth rates within each regime. These findings support the hypothesis that political institutions are one of the deep causes of growth, setting the stage in which economic institutions and standard covariates operate.     

Stability, global dynamics and Markov equilibrium in models of endogenous economic growth

This paper studies the local and global dynamics of two-sector models of endogenous growth with economy-wide external effects and taxes on capital and labor. The local analysis classifies the parameter space depending on the number of stationary solutions and local stability of equilibria. The global analysis shows that if taxes are within certain bounds and the size of the external effects on the average level of human capital is smaller than the share of physical capital, the equilibrium path is monotone and therefore a continuous Markov equilibrium can be constructed.     

Entry and growth in a perfectly competitive vintage model

A perfectly competitive vintage-knowledge model of Schumpeterian growth is introduced to study the relation between growth, technology-lifetime, entry, and productivity-dispersion. The incentive to innovate is generated by the productivity-dispersion (latent in traditional vintage models) between new and old plants, rather than by monopoly rents. The model has a unique steady-state REE with endogenous growth. The endogenous extent of entry constitutes a buffer, dampening the effect of research-efficiency and completely neutralizing the effect of population size or population growth rates on per-capita income levels and growth rates. Variations of research-efficiency lead to a negative relation between growth and vintage-lifetime and a non-monotonic relation between growth and productivity-dispersion.     

NON‐SCALE EFFECTS OF INTERNATIONAL TECHNOLOGICAL‐KNOWLEDGE DIFFUSION ON SOUTHERN GROWTH AND WAGES

We develop a dynamic, general equilibrium non‐scale endogenous growth model of North–South technological‐knowledge diffusion by imitation. Countries differ in levels of exogenous productivity, human‐capital levels and R&D capacity. Growth is driven by Northern innovative R&D and the South converges towards the North. Growth is also driven by human‐capital accumulation, scale effects are removed, imitation is only feasible once a threshold distance to the frontier has been attained and is dependent on the South's relative level of employed human capital and on domestic policies promoting R&D. Imitation promotes partial convergence of inter‐country wages and governs the path of intra‐South wage inequality.     

The struggle to survive in the R&D sector: Implications for innovation and growth

By allowing for investment activities by research and development (R&D) firms to prevent product obsolescence, we show that if legal patent protection is too strong, a higher R&D subsidy rate delivers insufficient investments for survival in the R&D sector, depressing innovation and growth in the long run.     

On the long-run wealth distribution in a simple Ramsey model with heterogeneous households

This paper analyzes the long-run wealth distribution in a Ramsey model where individuals have a common rate of time preference but different intertemporal elasticities of substitution. As a result, it is shown that heterogeneity among households in intertemporal substitution is sufficient for the existence of a non-degenerate long-run wealth distribution. We also investigate the properties of the long-run wealth distribution and the transition of capital and consumption using the phase diagram.     

The impact of the Interaction between institutional quality and aid volatility on growth: theory and evidence

We analyze both theoretically and empirically, the effect of aid volatility and its interaction effect with institutional quality on per capita economic growth. Our theoretical model, in which an aid-recipient government, operating in an institutional environment of some given quality (making choices over the distribution of aid), predicts that a negative effect of aid volatility on growth is mitigated by stronger institutional quality. We use panel data covering the period 1984–2004 for 78 countries to test this theoretical prediction. Using Generalised Methods of Moments (GMM) we find the relationship between growth and aid volatility is significantly negative and depends on institutional quality. Our baseline results are robust to various computations of aid volatility and foreign aid, time periods, sub-samples and additional covariates.     

Horizontal innovation-based growth and product market competition

The influence of the intensity of competition in the product market on economic growth is analyzed by developing an endogenous growth model with horizontal innovation. Product market competition is measured by (1 − Lerner index) and depends on both the share of factor inputs in total income and the degree of substitutability across goods. We find that the shape of the relationship between competition and growth can change dramatically according to which proxy of competition is used. We explain our results in terms of the interplay between the resource allocation and the profit incentive effects.