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).
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.
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:
(The full methodology used is available in the essay “Convergence in Productivity, R&D Intensity and Technology Adoption.”)
Santacreu found positive and statistically significant effects of both factors on productivity growth:
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.”