Productivity Growth: Learn from Other Countries or Innovate Yourself?

September 18, 2017
Thinkstock/Olivier Le Moal

Economists have argued that productivity growth—that is, using labor and capital more efficiently—is the main driver of economic growth, rather than simply adding more labor or capital. Furthermore, they believe that the main driver of productivity growth is innovation. But as a recent Economic Synopses essay explored, it’s not just simply about putting more resources into research and development (R&D).

Economic Growth and Innovation

Economist Ana Maria Santacreu noted that the correlation between research intensity and economic growth isn’t very strong, with innovative activity concentrated in very few (and very rich) countries: The U.S., South Korea, Japan and Germany account for the majority of global R&D.

“These ‘leaders’ are expanding the technology frontier,” Santacreu wrote. “However, countries farther behind the technology frontier—‘followers’—can also grow by importing technology from the leaders.”

She explained that simply transferring technology from leader countries to follower countries is an important way for follower countries to grow. An example would be a multinational company with locations or partners in some of these countries.

Two Sources of Productivity Growth

Santacreu examined the roles of innovation and technology transfer in explaining productivity growth and convergence at the industry level for 19 countries and 10 manufacturing industries from 1999-2007:

  • She used total business R&D personnel (as a percentage of the total population) to measure R&D activity.
  • She used the gap in the level of total factor productivity (TFP) between the countries studied and the U.S. in 1999 to measure potential technology transfer.

(The full methodology used is available in the essay “Convergence in Productivity, R&D Intensity and Technology Adoption.”)

Findings on Influencing Productivity Growth

Santacreu found positive and statistically significant effects of both factors on productivity growth:

  • Regarding technology transfer, Santacreu found that countries with a lower level of TFP relative to the U.S. (that is, a greater scope for importing technology) experience faster manufacturing productivity growth.
  • Regarding R&D activity, countries that invest more in R&D have a larger increase in productivity.

She wrote: “Taken together, the results show that both domestic innovation and technology transfer play a significant role in productivity growth. Given two country-industry pairs with the same productivity gap relative to the United States, the one that invests more in R&D will have faster productivity growth.”

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This blog offers commentary, analysis and data from our economists and experts. Views expressed are not necessarily those of the St. Louis Fed or Federal Reserve System.

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