Technological Innovation, Industrial Evolution, and Economic Growth

Sanjaya Panth

• Publisher: Routledge
• Year: 2013
• Print ISBN:
  9780815327844
• eBook ISBN:
  9781135652050
• Topic: Business
• Subtopic: Business General
• Index: Business

First Published in 1998. This book investigates the determinants of technological change and the role played by such change in the process of economic growth. The factors influencing the extent and dissemination of technological progress at the firm, industrial and societal levels are identified and the impact on the rate of economic growth of these factors is studied. Government policies that seek to increase economic growth through both direct and indirect manipulation of the channels affecting technological change are then considered. A key finding of the book, as contained in chapter two, is that in some cases, government efforts to increase economic growth may actually have the opposite effect in the short-term before eventually yielding the desired results.

II
Research and Development, Physical Capital Formation, and Economic Growth

This chapter analyzes the relative roles played in the process of economic growth by investment in physical capital formation and investment in research and development. A distinguishing feature of research is the possibility of redundancy resulting from a duplication of efforts on the part of individual economic agents, each of whom is motivated by the monopoly rents that accrue to the single innovator who is the first to discover and implement a given technology. Although research increases factor productivity, a diversion of labor from production to research is not costless from a growth perspective. It occurs at the cost of a decline in the production of capital goods, a fundamental engine of economic growth. On the other hand, the increase in total factor productivity resulting from more labor engaged in research depends on how labor is allocated among rival firms and the extent of research duplication by such rivals. The net growth effect of lower capital formation and increased labor in research then depends crucially on the degree of competition and duplication of research in industry. This chapter develops and analyzes a dynamic general equilibrium model where the fractions of the labor force engaged in production and research, firm research intensities, and the degree of competition and duplication are endogenously determined with aggregate prices and output. The impact of changes in the intensity of competition on total factor productivity growth and on the growth rates of capital and output in the short-run and in the long-run are shown to be remarkably different. The intensity of competition is in turn shown to be dependent on income distribution and fiscal policy.

An application of the model lies m explaining why a downsizing of government, a typical ingredient of structural reform, leads to a period of reduced physical capital investment and temporarily lower rates of economic growth. The temporary adverse effects of such reform on growth and capital formation are well documented, e.g. in the World Bank's 1992 report. It is shown in this chapter that reduced taxes lead to a diversion of labor from production to efforts at innovation which causes this phenomenon. It is a result of the short-run tradeoff between innovation and production.

Despite the aforementioned short-run tradeoff, an examination of cross-country data illustrates that economies with a larger fraction of their workforce engaged in research exhibit higher rates of economic growth and capital accumulation (see table 5 in the appendix). Note in particular the correlation of 0.6 between the rate of capital accumulation and the fraction of the workforce engaged in R&D. The implications of the model developed in this chapter are consistent with this observation even when more research goes hand in hand with increased duplication. The chapter shows that the long-run and short-run effects of increased competition on capital accumulation and growth are quite different. While a short-run tradeoff does exist between increased competition in research and capital accumulation, in the long-run no such tradeoff exists. In fact, the long-run rate of capital accumulation is positively related to the amount of competition and duplication even when competitive forces prevent the implementation of most of the research that takes place.

Models of endogenous growth in the tradition of Romer (1990), Segerstrom et al. (1990), and Aghion and Howitt (1992) have illustrated the importance of technological innovations in determining the rate of economic growth. These studies abstracted, however, from issues of duplication of research by individual economic agents as is likely in research. Since only a single blueprint of any new innovation is needed, this duplication may at first appear to be wasteful from the point of view of society as a whole as it diverts resources from the production of capital goods. Partial equilibrium models of patent races such as those in Loury (1979), Lee and Wilde (1980) and Reinganum (1982) have emphasized the positive effects on the arrival rate of innovations exercised by increased competition and duplication of research efforts within a single industry. By their very nature, however, these latter papers preclude any analysis of the adverse impact on aggregate economic growth caused by the diversion of productive resources from capital formation to duplicated research efforts on the part of economic agents.

This chapter integrates themes from these two bodies of literature in order to explicitly analyze the effect on the growth rate of the economy of not only increased competition in research but also of the resultant decrease in investment in physical capital formation due to a smaller fraction of labor engaged in production. The steady state rates of growth of aggregate output and capital stock are shown to increase with both competition in research as well as the intensity of research at the firm level. A crucial determinant of both of these variables is shown to be the distribution of income. Any policy that affects income distribution then affects the growth rates of the economy in the long-run.

Unexpected policy changes can, however, have large transitionary effects in the opposite direction from those intended for the long-run. A lowering of taxes on savers in the economy diverts resources to attempts at innovations. The immediate impact is a sharp drop in growth rates with even the possibility of negative growth if the tax reduction is drastic enough. There is also a concurrent drop in investment in physical capital formation. Growth rates rebound subsequently but since current growth rates depend on innovations in total factor productivity as well as on lagged values of past growth rates, this drop in physical capital formation drags down the growth rate of the economy before it eventually reaches and then surpasses previous growth rates. Increased competition in the private sector occurs concurrently with lower growth. It is hoped that this property of the model will prove helpful in explaining some of the features of economies undergoing structural change.

Note that this drop in growth rates does not occur because of a decline in productivity. In fact the rate of productivity growth accelerates relative to the past. However, due to the adverse impact on investment in physical capital, it takes time for the positive effects of increased productivity to outweigh the negative impact on the capital stock. In this regard, the mechanism leading to this transitionary effect is quite different from the one found in Atkeson and Kehoe (1993) where a temporary endogenous decrease in productivity plays the crucial role. This chapter on the other hand shows that increases in productivity can occur concurrently with a decline in the growth rate and the rate of physical capital growth.

The main ingredients of the model constructed in this chapter are as follows. The demographic structure is taken to be that of a two period lived overlapping generations model with constant population. Each agent works only in youth. There exist a large number of intermediate good industries in the economy with each indust...

Table of contents

• Cover Page
• Half Title page
• Title Page
• Copyright Page
• Dedication Page
• Contents
• Figures
• Introduction
• Acknowledgments
• Competition, Innovation, and Productivity Growth
• Research and Development, Physical Capital Formation, and Economic Growth
• The Dissemination of New Knowledge and Economic Growth
• Appendix
• Bibliography
• Index