erc/metu
INTERNATIONAL CONFERENCE IN ECONOMICS  IV
September 13-16, 2000, Ankara

Test of Endogenous Growth Theory via Technological Spill-over Effects of International Capital Good Flows

Nejat Erk (Çukurova Unıversıty)
Sanlı Ateş (Çukurova Unıversıty)
Ismaıl Tuncer (Çukurova Unıversıty)

Abstract  

Research and discussions on international trade strategies and economic growth performance goes back to Adam Smith’s major contribution “Wealth of Nations”. Although there is a common belief that openness in international trade has positive contributions to economic growth, theory and testing of models entail certain economic difficulties. To test the long term implications of implemented policies and long run productivity increases we face two alternative approaches. Initial attempt, is known as the neoclassical growth approach, which carries traditional growth properties. In this approach, majority adopting the Solow growth model emphasizes that, long term growth process relies on exogeneous technological growth rate. Although empirical studies show a positive correlation between investment and growth of Per capita income, these models display level effects but not growth effects of investment changes. Basic reason for such a finding, is the existence of diminishing returns. Under constant growth rate of exogeneous technology, the economy experience the process of income growth (level effect). The neoclassical growth theory is based on the assumption that every firm or economy can take and adopt a new technology without bearing any cost. Therefore, the spillover effects of technology via international flows of capital goods and knowledge can not be captured by this models. Another assumption that bother in the neoclassical growth model is the perfect competition. However, the main characteristics of the new growth models that produce long-run growth effect is the imperfect competition of goods and factor markets. Although during the 1960’s some studies (Arrow, 1962; Shell, 1966; Nordhaus, 1969) attempt to endogenize technological progress, those models couldn’t have captured long-run growth effects. The second approach is based on the developments in growth theory that known as endogeneous growth models, and on new imperfect competition models of international trade. In this approach, the diminishing returns on reproducable factors are eliminated and/or externalities goes to the fore (Romer, 1986 and 1989; Lucas, 1988). According to Romer (1986) knowledge and ideas have the nonrivalrous property. This property initiates increasing return to scale and in turn increasing return requires imperfect competition. Romer (1989 and 1993) are very good examples of this body of literature. The production process of this model is using labor, capital and many intermediate goods. Firms either can concentrate in production of final goods and services or in production of intermediate goods. Whereas more resources transferred to the R & D sector, the number of intermediate goods increases and marginal productivity of capital rises. Since international trade makes possible to reach a great number of intermediate goods, it has positive effects on growth rates. Quah and Rauch (1990) also develop a model in which importation of intermediate and capital goods removes bottlenecks in the economy. Therefore international trade aids removing these bottlenecks and enables higher growth rates. The common features of these studies are, as mentioned above: knowledge (ideas) are not rivalrous, displaying public goods properties and they emphasizing the importance of spillover effects. Following this line of research, Gene Grossman, Elhanan Helpman, David T. Coe, Romer and Rivera-Batiz (1991), Blomsrtöm, Lipsey and Zejan (1992) and some other economists in a sequence of papers, they analyzing the effects of knowledge accumulation and diffusion by emphasizing the roles of international trade in facilitating technology transfers between countries. According to those papers the accumulation of knowledge and growth generally can be affected by four different ways. By following Grossman and Helpman (1991) and Coe and et al. (1995): (1) If the residents of a country meet and interact with foreign counterparts, they may find occasions to learn technical information that contributes to their country’s stock of general knowledge. (2) By importing differentiated capital goods, the value added of the production process could be improved. The high volume of these kind of imports may lead to creation of new ideas. (3) International trade facilitates imitation and absorption of new technologies. According to some economists imitation and absorption of new technologies have very important bearing in the development of Japan and East Asian Countries. (4) By exportation of domestic goods and services, exporters of these goods may came in with new ideas improving the production process. Additionally, international trade indirectly raises the production capacity of the economy through improving the imitation and absorption ability of the country. (Grossman and Helpman, 1991; Coe et. al, 1995). In this framework, international trade is an element that increase total factor productivity of the country. In other words, international trade enable the country to use many intermediate and capital goods which increases the productivity of its own resources. These inputs may be either complimentary to each other or vertically differentiated capital goods. (Coe et. al., 1997). Moreover, foreign direct investments also is an instrument that facilitates technology transfers and knowledge spillovers between countries and industries. However in terms of developing countries, intermediate goods which is well endowed with knowledge not produced domestically, and information towards improving technology are the key determinants of rational behavior. Technology endowed via direct foreign investment and with imported capital goods seems to be the major factors contributing to long-term growth. In this research we would explore the impact of imported foreign capital goods under the scope of new endogeneous economic growth models. In this respect, technology generating developed world and technology importing developing world will be econometrically tested in terms technologies contribution to economic growth performance which is endowed via imports.

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