Is Innovation/Technology an Engine of Growth?

Motoo Kusakabe

Solow’ Growth Model

• Technological Progress (TFP) explains 90% of Economic Growth

• However, in the Solow’s Model, TFP is a “Residual” and the Model does not explain how TFP is determined

• Apart from exogenous technical change, productivity growth would fall to zero (diminishing returns of capital)

• The Model does not provide any policy advice

Endogenous Growth Models

• Endogenous Growth Models try to explain how TFP (Technology change) is determined

• Two types of Endogenous Growth Models:– Learning-by-Doing Approach– Separate R&D sector Approach

Learning-By-Doing Approach

• Technology change is embodies in “using machinery embodying new technology (Arrow Vintage Model)

• Romer (1986), and Lucas (1988) thought the technological progress was made through investing in machinery and human capital

• They assume “increasing rate of return to scale”

• No convergence, (“rich country remain rich”)

R&D Model

• Romer(1990), Grossman, Helpman(1991), Aghion, Howitt(1991) proposed R&D Model to explain the TFP growth

• They assumed a separate R&D sector to produce “knowledge”

• “knowledge” has externality so it increases the productivity of others’ knowledge production

• This externality will off-set the diminishing rate of return (“technology spillover”)

Implication of the R&D Model

• If technology spillover is global, welfare of countries will converge. – If it is “local” diverging patterns multiply. – Some countries “locked-in” in low productivity

Characteristics of Technology

• Technology/Knowledge is a “Public Good”– Non-Rivalry: if technology is used by someone, it does

not prevent others to use the same technology

• Technology/Knowledge has a large “Externality”– Inventor of the technology cannot monopolize all the

benefit of the technology: “Technology Spillover”– Other firms can utilize the technology: “Standing on

the Shoulder”

Technology/Knowledge is not a complete Public Good

• Patent system protect the inventors’ right to appropriate the profit for certain period, – But Patent cannot fully protect the inventors’ right

• Imitators cannot imitate the technology without investing in R&D resources or social contact

Why Knowledge cannot be copied without effort?

• Only a broad outline of technology is “Codified” (Polanyi 1958)

• Other parts “Tacit”• Tacit knowledge can be transferred only by

“person-to-person instruction”• “Face-to-face” interaction is most effective in

the transfer of tacit knowledge

Technology diffusion

• On average 90% of a country’s technology is foreign technology

• Technology diffusion is very important for economic growth

Channels of Technology Diffusion

• Formal Market Channel– Royalty Payment

• Technology “Spillover”– Imports (Eaton Kortum 2002)– Import weighted Foreign R&D (Coe & Helpman 1995)– Exports (Claridge, Lach, Tybout 1998)– FDI: no evidence for FDI spillover, but interesting case

studies: Intel’s FDI in Costa Rica– Human Migration (India, Taiwan, China, Armenia,etc)

Is Technology Diffusion global or local?

• “Within-Country” Diffusion is much larger than “Between-Country” Diffusion (Eaton, Kortum 1999)

• Keller (2002) found strong decay of diffusion by the distance of the two countries. But decay parameter diminishes substantially from the 1970s to the 1990s

What kind of Human Capital do contribute to Technical Diffusion?

• What is the determinant of successful technical diffusion? (“Absorptive Capacity”)– Human Capital (Nelson, Phelps1966), – Researcher and Technicians, Tertiary education is

important for productivity growth (Kusakabe 2008

– R & D Expenditure (Cohen, Levinthal 1989), (Redding, Reneen 2000), (Kusakabe 2008)

Are Lower Income Countries capable of absorbing foreign technologies?

• R&D/GDP– India 0.8%%, China 0.7%, Moldova, 0.8%, Uganda

0.8%, Tunisia 0.5%

• Patent Applications by Residents/GDP

Patent Application by Residents/GDP

Rank Country

1 Moldova Low

2 Korea, Rep.

3 Mongolia Low

4 Japan

5 Armenia Low

6 Kyrgyz Republic Low

7 Uzbekistan Low

8 Russian Federation Lower Middle

9 Belarus Lower Middle

10 Georgia Low

11 Germany

12 Sweden

Regional Industrial Clusters

• Technical Diffusion is local => Merit of Agglomeration

• Skilled Labor is scares => Merit of concentrate to a specific region

Structure of a Cluster

• Consisting of many small & Medium enterprises

• Leading company(ies) get order from foreign countries

• division of labor: There is a independent firms with different skills in charge of different processing stages

• Examples: Italian Industrial Districts, Japanese Keihin Cluster, Silicon Valley

Success Factor for creating a cluster

• Universities as a core of networks• Concentration of skilled, or “creative” class

people• Institution to support start-up firms+ Venture

capital funds, incubators, science parks• Culture to encourage entrepreneurship, risk-

taking• Voluntary sector, community to support social

networking