Fagerberg 1994: Technology and international differences in growth rates

Introduction
Main question: Why does growth differ across countries?
Well known fact that some countries grow faster than others e.g. postwar Japan, but major differences in growth can
been in OECD and across developing world
Many have attributed differences to varying levels of technology but way tech is perceived in Solow models is not
consistent with this
Neoclassical standard theory, as laid out by Solow assumes tech is a pure public good, available to everyone free of
charge i.e. all countrys share same pool of technology but this does not explain what we are seeing so other theories
have started to add other explanatory factors like a technology gap where tech is seen as less public, partly
appropriable and les neutral as tech progress and factor accumulation may be complementary to some extent

Traditional Growth Theory
In the past this question has been answered using on income distribution, capital accumulation and growth not tech
Post-Keynesian growth theories- shared belief market forces were not sufficient to secure growth with full
employment - Neoclassical growth proposed by Solow opposite of this
Solow neoclassical growth model:
- Perfect competition and information, maximising behaviour
- No externalities, positive and decreasing marginal products
- Share of savings in GDP and rate of growth of labour force taken as given
- As capital per worker increases MPK declines and scope for further increase in K-L ratio
- K-L ratio ultimately reaches a constant and productivity growth stops
- GDP, capital stock, labour force all grow at same exogenously determined rate
- To allow for long run growth in GDP per capita, he added exogenous term technological progress tech or
knowledge was seen as free good, accessible to all at no charge
- If tech is freely available in say the USA it will be at the global level too
- Denison because knowledge is an intl commodity I should expect the contribution of advances of knowledge to
be at about the same size in all the counties
- Thus model predicts in LR GDP per capita in all countries will grow at same exogenously determined rate of tech
progress and transitional dynamics are what explain difference in per capita growth across countries as initial
conditions differ so countries may grow at different rates towards a long run equilibrium
- Poor countries growing faster than rich capital is scarce, higher MPK, higher per capita growth (assumes capital
mobile and moves where potential profit is higher) thus gaps in income levels between rich and poor should
narrow and disappear
Several pointed out that this model downplays role of capital accumulation in the LR and overlooks interaction
btween capital accumulation and technological progress: new tech is usually emobodied in new capital goods
Arrow/Mirrlees
- Opposite to Solow, instead present models of economic growth where tech progress is endogenized as learning
by doing
- New vintages of capital goods embody improvements based on experiences with previous vintage
- Technological progress is interpreted as an externality unintended side effect of other economic activities
(investment)
- Arrow points out though that this does not take into account the part of tech progress that come through R&D in
investment in private firms
Growth Accounting
Research on growth aimed to decompose growth GDP
Solow model predicts that apart from tech progress GDP growth will be a weighted sum of growth in physical capital
and labour force with shares of capital and labour in national income as weights :
Abramovitz 1956 use this to calculated contributions to economic growth from factor growth
- Historical study of US growth, results indicated that only small part of US productivity growth could be explained
by factor growth, thus most had to be classified as unidentified TFP (the residual)
Denison 1987: Most influential studies of why growth rates differ
- Study loosk at growth of 10 capitalist economies between 1950 and 1962 and 1976 similar study extends country
coverage to Japan
- First the contributions of factor growth (capital, labour and land) are deducted
- Contribution from the growth of labour fore is adjusted to take into account changes in unemployment, hours
worked, sex, education
- What remains is TFP this is then further reduced by taking into account contribution to growth from structural
changes in employment mix (from low productivity to high productivity activities) from better utilisation of
economies of scale (through growth of markets, reduced barriers to trade) and other less important factors
- Finally residual is divided into 2 parts assumed to reflect technological progress and catch up
- Internal structural disequilibrium are taken into account and economies of scale allowed for (both assumed away
in the neoclassical)
- But when it comes to tech, he adopts solow definition of it as a public good what remains when tech progress of
this kind is accounted for is attributed to technological catch up
- He concludes that many European OECD countries did not benefit from technological catch up in the 1950s and
60s, and for japan catch up played a huge role - this is clearly at odds with tech as free good assumption (as
imitation should be easy if this is the case)
- This contradiction may be explained by finding that much of what is commonly regarded as tech catch up is
classified elsewhere in table e.g. fastest growing economies largest gains are from economies of scale in
industries this way of classifying gains is suspect -would these gains have been possible without diffusion of
tech from US to Europe? probably not
- However because these technologies were capital and scale intensive such successful diffusion required both
large investment and large markets and thus as Abramovitz points out many of the facts used by Denison were
interdependent
Problem of interdependence between factors is critical for growth accounting if interdependence is important,
then decompositions made by growth accountants and policy conclusions based on them may be flawed
Abramovitz sources of interdependence:
1) Technological progress may be embodied in new capital goods if capital accumulation speeds up so will
contribution to growth from tech progress and vice versa in most growth accounts and regressions this
growth from this interaction is credited to capital thus overemphasizing contribution from this factor
2) Traditional growth theory rests on assumption of neutral tech progress without this a long run equil may be
difficult to define if tech progress is biased the fact that benefits most from tech progress will come to be
used more frequently, grow fast hence contributions from tech progress and factor growth will be
interdependent and may be empirically indistinguishable e.g. Abramovitz argues that progress in US in 19C
had a capital using bias and that explain the high rate of growth of capital during this period conventional
accounts attributes most of growth to capital growth and little to exogenous tech progress but if abramovitz
is right then this needs to be reassessed
3) Introduction of new techniques into production leads to learning by doing, using etc (Arrow): contribution
from capital accumulation and technological progress must be interdependent
Weak explanatory power of model was related as much to how factors taken into account were conceived including
their interrelatedness as to possible missing factors
Technology gap approach to economic growth
Nelson and Winter (1982) distinguish between 2 levels of analysis in economics theories: formal and appreciative
Formal: abstract structure set up to enable on e to explore find an check logical connections (Neoclassical)
- Always proceeds at some intellectual distance from what is known empirically and where it does directly appeal
to data for support it generally appeals to stylized facts
- E.g. neoclassical theory of growth fully fledged theoretical construct
- Whatever the source of cross country differences in GDP per capita, it is not technology because this is assumed to
be a public good
Appreciative: story telling close to empirics (Tech gap theory)
- Close to empirical work and provide guidance and interpretation mostly expressed verbally and is the analyst
articulation of what he or she thinks is going on
- Generally refers to observed empirical relationships but go beyond them and lay causal interpretation on them
- E.g. technology gaps literature what makes this differ from neoclassical is the way technology is perceive see
tech differences as prime cause for differences in GDP per capita across countries, they accept tech has some
public good characteristics but do not see these as essential
- Instead stress tech or know how on how to do things is embedded in organisation structures, firms, networks,
institutions etc and is more often than not difficult and costly to transfer from one setting to another
- Firms have different intrinsic capabilities and strategies and are seen as key players
- Tech change is analysed as the joint outcome of innovation and learning activities within organisations, especially
firms and the interaction between these and their environments
- Cumulative and path dependent character of this process is stressed
- Country specific factors are assumed to influence process of tech change thus giving the technologies and
processes of tech change of different countries a distinct national flavour national technology
- Thus many writers in this view countries as separate technological systems with own specific dynamics e.g.
Lundvall national system of innovation
Leaders and followers
Early literature int his area concerned with distinction between countries on and behind the technological frontier for
technologically backward countries the gap in tech vis a vis the more advanced countries represents a great
promise which however is difficult to fulfil for 2 major reasons (Gerschenkron 1962)
1) In backward countries there will normally be important parts of society that resist change some cases
strong enough to close gap e.g. Russia, failure to abolish serfdom at appropriate time
2) Late starters face large requirements for capital and other advanced factors than those that prevailed at an
early stage e.g. industrialisation of Britain occurred gradually, characterised by small scale and low capital
requirements when Germany later entered the process of industrialisation, scale and capital requirements
had increased, this required many to develop ne institutional instruments for which there was little or not
counterpart in an established industrial country above all in the financial sector - also emphasises
importance of ideologies
Following his view, catch up is by no means automatic but requires significant amount of effort and institution
building social capability to designate those factors constituting a countrys ability to import or engage in tech or
organizational progress
Abramovitz in analysis of OECD growth suggested technical competence (proxied by education) and political
commercial industrial and financial situations as important elements of social capability he also points out that
because tech is shaped by the environment in which is develops, countries that differ much from leader country in
factor supply market seize etc may find it difficult to apply leader country technology
He proposes term Technological congruence for this aspect of catching up process
Closing the gap?
Most tech gap studies have been descriptive, focus being on growth in industrialised or OECD members
Main lesson from these studies comes form analysing gap in labour productivity between US and 15 other
industrialised countries: 1870-1987
- From 1870 until end of WW1 US increased its lead and remained virtually unchanged in interwar period
- US lead increased further during wartime in 1940s but since 1950 gap has been shrinking thus catching up is a
post WW2 phenomenon (Catching up = gap in productivity between leader country and group of follower country
reduced)
How is this explained?
- Abramovitz, Nelson & Wright point out that US tech lead has been based on 2 pillars
Pillar 1: US advantage in resource capital and scale intensive technologies
- Rich resource base, relatively high wage level and worlds largest homogenous market implied together with
political regime favouring free enterprise- a new combination of incentives and opportunities that US capitalist
were quick to react to this lead to series of related tech, organizational, managerial innovations which raised
productivity, wages and hence demand for mass consumption products, further strengthening US lead in so called
American way of life products
- Why did it take so long for other countries to exploit the technologies made in the US
o Technologies are embedded in organisations are not easily transferable to all other settings
o Differences in strategies of firms caused by broader inter country differences in history, culture, values,
norms institutions may have played a rule
o But a lot of the blame is put on lack of technological congruence (Abramovitz)
o The European countries and Japan had less natural resources, markets small, demand less homogenous
thus given these constraints US tech if transferred to another setting would not necessarily always be
superior to those already there
o Arguably these constraints were enforced by economic problems of interwar period, where there was
increasing protectionism, declining trade and slow uneven growth so US kept its lead and it increased
during WW2
Pillar 2: high tech industry
- More recent origin of large private and public educational investments during a prolonged period especially in
higher education; the rise of the modern corporation with separate R&D departments; large public investments in
high tech industries post WW2
- Post WW2 period became a convergence boom (Abramovit`) based on erosion of US lead along both dimensions
due to interrelated factors:
1) Conditions of follower countries became more congruent to those that prevailed in the US domestic, intl
markets rew standard of living rise shares of national resources to investment in physical and human
capital increased many constraint which previously blocked catch up during interwar period gradually
removed creation of Bretton woods institutions, European economic integration (EFTA, EC) large
internationalised firms, increasing closeness between science and tech
2) Social capability improved through investments in education at university level substitution of adverse
relations between state firms and interest groups which prevailed in interwar period with more cooperative
arrangements, govt institutions to support tech and structural change giving follower countries to create new
institutional instruments
Whats next?
There is not reason that prevents overtaking in this theory of leaders at one time and new leaders to emerge
when national system of some country embarks on new superior path of technological change
But Nelson and Wright doubt that this part of the US experience can be duplicated nations once important but not
anymore - they say nations of the world have come to share a common technology vehicle of this change is growing
influence of TNCs aided by rising role for science (international) as compared to learning (national and local) in
technology creation
Others have found importance of home country for technological ability and competitive position of firms (Porter
1990) while globalisation of competition may appear to make the nation less important, instead it seems to make it
more so home nation is source of skills and tech that underpin competitive advantage other studies of technology
spillovers etc. emphasise extent to which they are geographically localised
Arguably more compelling evidence is needed before view of nelson and wright can be accepted, atm good reason to
be sceptical
Important question: how general are assumptions underlying the tech gap approach? writers in this tradition all put
nation at centre of analysis, assumption is that factors such as history culture language knit institutions and firms and
individuals in a specific way that is important to tech progress if this assumption is no longer valid this approach
loses significance
The catch up debate
Much catch up literature is descriptive, emphasis on historical analysis but some authors supplement argument with
statistical tests which until recently included one independent variable only GDP per capita (as proxy for scope of
catchup)
Lot have shown that diff I growth rates between OECD countries in postwar period can be explained by differences in
scope for catch up i.e that convergence in productivity levels took place
This has been critiqued and extended due to ex post selection bias to show that although group of converging
countries probably extends beyond OECD area, there is little support for convergence when all developing countries
are included
By adding educational variable into regression this changed results scope for catch up regained significance as
source of differences in growth rates but conditional on educational efforts conditional convergence (used in new
growth theories)
Conclude: simple catch up model with one independent variable is not sufficient to explain differences in growth.
Catching up is difficult and that only countries with appropriate economic and institutional characteristics will
succeed
Impact of national technological activities
Basic assumption of technology gap approach: gaps in productivity levels across countries to large extent reflect
technological differences, thus one should expected productivity (measured by GDP per capita) to correlate with
measures of national technological activities such as R&D and patent statistics
Test on this supported the point particularly for post WW2 period confirming evidence of large sample of developed
and NICs that importance in indgineous technological capability increases as country moves closer to tech frontier
Findings also argue certain level of R&D necessary for successful imitation
Tendency towards convergence in national levels of tech activities slowed after 1973
Fagerberg argues weakness of work in this area is that impact of indigenous technological activities in countries other
than frontier country (US) is ignored
Most industrialised countries contribute to advanced of tech frontier although not to the same extent in follower
countries imitation and innovation will be combined
Catch up of developed countries cannot rely on combination fo tech imports and investment but have to increase
national technological activities as well
Verspagen made non-linear model to show this (non linear-ness allows for both catching up and falling behind) model
suggests that countries with large tech gap and low social capability run risk of being caught in low growth trap,
Amable 1993 however does not confirm superiority of non linear version when compared to linear one he applies
same model to smaller sample presenting a linear catch up model where several factors were endogenised in this
model investment assumed to be endogenous (function of growth itself), innovative activity endogenous (unction of
education) model of endogenous technological change where exogenous variables are education and size of govt
Both converging and diverging growth paths were allowed found only minority of countries will catch up completely
Most countries will converge towards level below most advanced countries, while some will be caught in low growth
trap countries with low level education and high share of govt expenditure in GDP will be vulnerable
These models can be criticised and are different to previous ones, but show good examples of how interplay between
factors supporting convergence and divergence is conceived in this approach and what likely outcomes are most
important achievement is to show that unconditional convergence is not a central prediction

New theory-new evidence?
By 1980s predictions of convergence of Solow model did not occur, and theory had little to offer in terms of policy
advice
Neoclassical theories fell, new growth theories came - First attempt Romer
Romer Lucas etc show that within traditional neoclassic equilibrium setting, if technological spillovers are intl rather
than national in character and perfect intl capital markets exits consumers in all tend to be equally well off in terms
of welfare but when these assumptions are relaxed potential for divergence multiplies
Then the consequence look increasingly like those predicted by technology gap theorists
In these cases lock in situations may occur in which a country with CA in traditional industries may be permanently
worse off compared to country with CA in R&D
A small domestic market may also be considerable disadvantage for country under such circumstances
New growth theories share some common properties but still differences in content between intial models and later
models
Initial Models: tech progress assumed to be totally external to firms
- Aassume that new investment in physical and human capital lead to technological progress in form of learning by
doing this is assumed to be external to the firm so that there are CRS at firm level in IRS at aggregate level
- Thus Perf Comp assumption remains
- This model suggests why convergence does not take place the beneficial external effects of capital accumulation
outweigh detrimental consequences of increasing capital per work
- Hence MPK does not decline with GDP per capita - rich stay rich and poor stay poor
- Model takes into account only one particular aspect among several of tech progress
Later models: assume technological progress to result from intentional activities by firms
- There is a separate tech sector in economy that supplies other sectors producers by new tech from tech sector
and in return receive exclusive right to use of tech
- These producers must charge price above MC for what they produce i.e. imperfect competitions otherwise they
would not generate enough income to cover costs including initial investment in tech but in additional to private
component, innovation also has public component (externality) that facilitates rise in productivity of all
subsequent innovation projects
- This counteracts tendency towards decreasing productivity of new investments in innovative activity and allow
innovation and hence growth to go on
- Amount of growth depends on resource devoted to innovation (R&D), the degree to which new tech can be
privately appropriated (degree of monopoly) an time horizon (degree of patience of investors)
- High growth implies high growth in physical capital but this is not a cause of technological progress
- Broader view of etch progress which is more consistent with empirical research

Empirical evidence
Lot of papers since catch up debate and new growth theories where common theme: cross country regression of
productivity growth against GDP per capita, growth of labour force, investment ratio and some proxy for human
capital
Despite differences in theoretical perspective, empirical models very similar
Tech gap research use GDP per capita as explanatory variable to reflect degree of technological sophistication of the
country in neoclassical it was proxy for K-L ratio
Tech gap use investment ratio and growth of population as conditioning variables
Only when researchers in tech gap tradition started to include variables reflecting differences in national tech
activities as reflected in patent statistics did the estimated models begin to look different as in Solow there is no
room for this as tech progress assumed to be same everywhere
How should proper test of new growth theories be designed?
Variables taken into account can be split into 3 groups:
1) GDP per capita as proxy for gap in productivity and /or tech
2) Variables reflecting attempts to affect the gap such as investment, education and resources devoted to/output
form innovation activities
3) Other variables of economic political or institutional nature assumed to affect growth growth of population,
country size, degree of openness to trade, share of public sector in GDP etc
Some most important lessons can be drawn from existing literature:
1) General support is found for models where a gap variable reflect effort to close the gap
2) 2 effort variables most commonly used are investment and education both are supported by data but when both
are included impact of each in particular education diminishes
3) There are only few studies that include variables related to innovations such as R&D and patents etc in small
high income samples innovation variables shown to contribute to explanation of growth differences
Problem of interrelatedness of variables (flaw of growth accounting) is apparent in recent work too several studies
indicating that impact of education on growth is reduced when investment in physical capital are included can be
said that countries do not invest in either education of physical capital they are positively correlated, they invest in
moth making it difficult to distinguish between impacts of investments in education and physical capital
Similarly for openness to trade- variables such as imports export as share of GDP are found not to have significant
impact on growth when other conditioning variables are included however studies show that investment in physical
capital and openness are positively correlated - also positive impact of educational investment on growth depends on
increasing openness thus interdependence of factors impacts effect of openness on growth
To what extent can results of existing literature be used to discriminate between different theories in this area?
One important result is that there is little evidence of higher MPK in high income countries if anything it is the other
way round, as Solow would predict
Evidence also suggest that social and private returns to investment in physical capital are not significantly different
when proper account is taken to the impact of other forms of investment (unlike some who say social returns larger)
Existing evidence does not seem to give much support to the first versions of new growth theories
Global convergence as predicted by Solow is not supported in facts - But if one allows for differences in saving rates
across countries and include human capital it becomes harder to reject it
One possible testable prediction remains solow: technological progress is the same everywhere some new growth
theories predict that investment is endogenous but this s difficult to test for on existing data sets
Strongest challenge to interpretation proposed by followers of Solow comes from analyses that include not only
human capital but R&D Patents and other measures related to tech innovation e.g. finding that social returns to
privately funded R&D are about 7 times as high as private returns

Concluding remarks
In theoretical literature on growth, tech progress is conceived as a free good, as a by-product (externality) or as the
result of intentional R&D activities in private firms
All 3 have merits
- Research in universities and other public R&D institutions provide inputs to innovation process
- Learning by doing using interacting are important for technological progress
But now increasingly accepted that models that do not include third source: innovation as contributed by intentional
activities in private firms) overlook one of the most important sources of tech progress in capitalist economies
While formal theory still adopts traditional neoclassical perspective of firms as profit maximised endowed with
perfect info appreciative theories increasing portray firms as characterised by different capabilities (including
technology) and strategies and operating under considerable uncertainty with respect to future trends
Although some formal theories now accept importance of firms in tech progress, they tend to treat tech as blueprints
that can be traded on markets instead appreciative theorising describes tech as embedded, tacit, cumulative in
characterised influenced by interaction and geographically localised (National innovation systems)
Another difference in perspective relates to govt intervention in particular with respect to financial markets in
supporting the growth of national tech capabilities appreciative theorists argue that imperfect financial markets act
as constraint to successful catch up and that intervention in financial markets therefore is a must
Formal theorising retains neoclassical framework of perfect capital markets on a national or global level
As more research has been done and models made to assess impact of tech gaps and other factors on differences in
economies growth across countries consistent picture emerges potential for catch up is there but it is only realised
by countries that have sufficiently strong social capability i.e. those that manage to mobilise necessary resources
(investments, education R&D) results also indicate that many of these factor should be seen as complements rather
than substitutes to economic growth
One way to remedy would be to have sharper focus in models on underlying assumptions of competing view e.g. some
models assume sophisticated institutional structures in particular with regard to financial sectors but in poor
countries they are virtually non-existent