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Why do growth rates differ? Evidence from cross-country data on private sector production

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Abstract

We estimate standard production functions with a new cross-country data set on business sector production, wages and R&D investment for a selection of 14 OECD countries including the US. The data sample covers years the 1960–2004. The data suggest that growth differences can largely be explained by capital deepening and the ability to produce new technology in the form of new patents. We also find strong evidence of complementarity between patents and openness of the economy, but little evidence of increasing elasticity of substitution over time.

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Notes

  1. Basic institutions found to be important for growth have been discussed e.g., in Easterly (2001). On the role of technological innovations, see for instance Steil et al. (2002).

  2. Privatization and redefinitions of the public sector can also affect the measures of the business sector, but we believe this measure is still less akin to measurement problems.

  3. We estimated a conventional convergence equation in terms of the US (with the data from 13 countries) where the relative output growth was explained by lagged (log) level of relative output (expressed in Euros) and time dummies (fixed time effects). The estimate of the lagged output level was −0.0021, with a t-ratio of 2.24. The result is consistent with the convergence property although the effect is not particularly strong. For a more thorough analysis of convergence, see e.g., Caselli et al. (1996).

  4. As pointed out in the introduction, the data are related to the business sector only, covering the period 1960–2004. The data are annual. Output data have not been available for Greece. Most of the data are from the OECD database (including the STAN database for the R&D expenditures). The data are described in detail in Pyyhtiä (2007).

  5. Unfortunately, we have comparable data on R&D expenditures only for the period 1981–2004, so we cannot adequately control for R&D for the full sample period. Thus, we can only test the hypothesis that R&D has been particularly important in the last two decades.

  6. See e.g., Aghion and Howitt (1998, 2005) and Grossman and Helpman (1991) for a discussion of R&D accumulation, output and productivity.

  7. See e.g., Antras (2004) and Knight et al. (1993) on the possibilities and problems in estimating different growth models with panel data.

  8. Due to autocorrelation, the t-values do not follow the t-distribution.

  9. Yuhn (1991) finds some support for the Klump and De La Grandville hypothesis (2000) using data for South Korea and the US.

  10. Klump and Preissler (2000) discuss a relationship between elasticity of substitution of the economy and the overall flexibility of production and markets, readiness to make structural and institutional changes and so on. Elasticity of substitution between factors of production is itself a reasonably good indicator of overall structural flexibility of the economy.

  11. Willman (2002) points out that after increasing strongly in the 1970s, the share of labour income in GDP in the euro area decreased continuously in the two subsequent decades. This suggests that a Cobb-Douglas production function might not be an appropriate choice for production analysis. Furthermore, Duffy and Papageorgiou (2000) report relatively large differences in factor shares across the countries.

  12. For the latter half of the sample, the coefficient of k/l was not significant. When estimating the VES production function we seem, in general, to have problems in identifying the effect of technical change and the effect of changing elasticity of substitution. This is because the capital-output ratios show an upward trend in all countries included in our sample. Consequently, various combinations of technical change and substitution parameters produce almost identical error variance.

  13. See e.g., Jones (2003, 2005) for potential explanations of the poor performance of CES in the cross-country data. Jones’s explanation is that the short-run elasticity of substitution might deviate greatly from the long-run (unitary) elasticity.

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Acknowledgments

We are grateful to Jouko Vilmunen and two anonymous referees for many useful comments and Tarja Yrjölä for helping us with the data. Viren also thanks the OP Bank Group Research Foundation and the Turku PCRC for financial support. The views are those of the authors and do not necessarily reflect the views of the Bank of Finland.

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  1. Monetary Policy and Research Department, Bank of Finland, Helsinki, Finland

    Juha Kilponen & Matti Viren

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  1. Juha Kilponen
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  2. Matti Viren
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Correspondence to Juha Kilponen.

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Kilponen, J., Viren, M. Why do growth rates differ? Evidence from cross-country data on private sector production. Empirica 37, 311–328 (2010). https://doi.org/10.1007/s10663-009-9110-y

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