Total Factor Productivity Convergence in Developing Countries: Role of Technology Diffusion

• Published date: 01 June 2018
• Author: Khoula Maryam,Zainab Jehan
• DOI: http://doi.org/10.1111/saje.12189
• Date: 01 June 2018

TOTAL FACTOR PRODUCTIVITY CONVERGENCE IN

DEVELOPING COUNTRIES: ROLE OF TECHNOLOGY

DIFFUSION

KHOULA MARYAM

†

AND ZAINAB JEHAN*

Abstract

In recent years, though total factor productivity (TFP) convergence phenomenon has gained tremen-

dous importance yet further deliberations for identification of catalytic factors that can help develop-

ing countries to achieve their steady developmental paths, are under way. Against this backdrop,

present study investigates the principal determinants of TFP convergence by employing data of 91

developing countries over the period 1960–2015 and with USA being the frontier country. In con-

cordance with the existing literature, main focus remains on technology diffusion for the catch-up

process and is measured by means of trade openness (TO) and foreign direct investment (FDI) with

introduction of their interaction terms. However, TFP is computed by incorporating the Growth

Accounting Model while empirical results are drawn from the 2-step GMM estimation technique. It

is surfaced that though high degree of openness benefits TFP growth and convergence but FDI has

a dominating role. Therefore, governments can play a competent role via unflagging effo rts in ensur-

ing that the right kind of policies are enacted, promoting trading activities and FDI flows.

JEL Classification: O47, O33, J24, E31

Keywords: TFP, convergence, technology transfer, FDI, trade openness

1. INTRODUCTION

Decades of inquiry and experience have transformed the conventional debate regarding

the dependenceof economic growth on capitaldeepening and replenished with amalgama-

tion of other factors,with their even greater contributions. Technology, being one, remains

essentially an integral part of economic discussion. It is often considered a possible channel

for advancement and progression of the underdeveloped world, particularly, after the

emergence of European economies as world leaders in post-World War II period. The

upsurge in their productivity levels during this phase is regarded merely to be the outcome

of incorporation of technology in economic processes (Abramovitz, 1986).

Furthermore, in today’s world with the cut-throat competition and fast progres-

sion of business, adoption of technology has become pivotal, for countries to stay

competitive. Additionally, pertaining to the development theories that entail, deter-

minants of economic growth in particular for emerging economies, incorporation of

technological aspect has led to rapid paradigm shift. This change in focal point has

highlighted many other factors that are previously ignored. In this regard, intra and

* Corresponding author: Assistant Professor, Department of Economics, Fatima Jinnah

Women University, Rawalpindi, Pakistan. E-mail: zainabjehan.fjwu@gmail.com

†

Department of Economics, Fatima Jinnah Women University

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of Economics

inter regional disparity in terms of labour productivity has been the matter of discus-

sion for more than half a century.

The examination of convergence phenomenon remains essentially an important topic

for economists because of its economic implications for countries. It helps in identifica-

tion of factors that can act as erosive for poverty (both, absolute and relative) and income

disparities among nations when they catch-up to the world leaders by reducing labour

productivity or per capita income gaps. It has been defined as the process of faster growth

of emerging economies than leaders and their catching-up to them in terms of labour

productivity or per capita income (Boumol, 1986; Barro and Sala-i-Martin, 1992; Barro,

1991). However, it is implicitly defined by Thorstein Veblen as “penalty of being the

leader” in 1915 and later in 1952 by Alexander Gerschenkron who has supported the

idea of “relative backwardness” with subsequence of economic growth (Boumol, 1986).

Moreover, Schumpeter (1942) presents the idea of creative destruction as a means of eco-

nomic growth and catching-up process for emerging economies (Aghion and Howitt,

1992).

However, the neoclassical, exogenous growth model, presented by Solow (1956) has

explicitly introduced the terminology.

1

It has been projected that emerging economies on

their limited capital stock could earn higher marginal return providing them with an

opportunity to catchup to advanced nations and converge to their steady state. Nonethe-

less, convergence is explained by way of labour productivity, moreover, it is suggested

that only as a consequence of technological progression countries can acquire a higher

stable state.

2

Till 1960s, it is believed that technology is an outcome of exogenous factors,

thus it cannot be incorporated in a model. But, Arrow (1962) nullifies this concept by

presenting “New-Growth Theory” which endogenizes technology and seeks to explain its

prominence in economic growth.

3

Following this, other endogenous growth models are

presented by Frankel (1962), Romer (1986) and Lucas (1988) (Vogel, 2015).

Though Romer (1986) and Lucas (1988) have negated the idea of per capita income

convergence due to the increasing returns and technological level that vary considerably

across countries. Barro and Sala-i-Martin (1997) and Howitt (2000) stress upon techno-

logical convergence as a consequence of technical diffusion among economies. Where the

former considers knowledge transference between leaders and followers resulting in

upgradation of production techniques. Later, an extension of Schumpeterian growth

model asserts that only those countries which are engaged in research and development

activities can experience the convergence process (Khan, 2012).

Additionally, trade and FDI, among others, are regarded as prominent determinants

of TFP convergence by many studies including Yaoxing (2010) and Naz et al. (2015).

Since, both these factors help acquire cutting-edge foreign technology, they ultimately

increase efficiency, effectiveness and skills of productive assets in the economy, boost

competition and facilitate capital accumulation. Pavcnik (2002) has advocated positive

impact of trade liberalization on productivity by means of efficient allocation of resour-

ces. Moreover, some other studies that come to similar conclusions (contemplating TFP

growth) include Nishimizu and Robinson (1984), Urata and Yokota (1994), Jonsson and

1

Solow considers technology as a consequence of factors outside the jurisdiction of economies.

2

The technology element in production function is TFP or Solow residual; the technical change

over time that is not affected by the changes in labour and capital.

3

Technologicalprogression is considered by means of learning by doing.

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