Impact of ICT in the developing countries on the economic growth

TABLE OF CONTENTS

LIST OF FIGURES AND TABLES

LIST OF ABBREVIATIONS

1 INTRODUCTION

2 ICT AND THE GROWTH THEORY
2.1 MEASUREMENT OF ECONOMIC GROWTH
2.2 THEORIES OF ECONOMIC GROWTH
2.2.1 Neo-classical Growth Model
2.2.2 Endogenous Growth Theory
2.3 CONCLUSION FOR ICT FROM THE GROWTH THEORY

3 INFLUENCE OF ICT ON ECONOMIC GROWTH
3.1 ICT AND ITS ECONOMIC BENEFITS
3.2 CONTRIBUTION OF ICT TO ECONOMIC GROWTH AND ITS DETERMINANTS
3.3 FACTORS INFLUENCING THE CONTRIBUTION OF ICT TO GROWTH

4 POTENTIAL OF ICT FOR ECONOMIC GROWTH IN DEVELOPING COUNTRIES.
4.1 CLASSIFICATION OF DEVELOPING COUNTRIES
4.2 STATE OF ICT IN DEVELOPING COUNTRIES
4.3 ICT IMPLICATIONS FOR THE DEVELOPING WORLD

5 SUMMARY

6 REFERENCES

Abstract

This paper discusses the relevance of Information and Communication Technologies (ICT) for economic growth in developing economies. By reviewing the contributions from the neoclassical and endogenous growth theory and empiric evidences for the link between ICT and economic growth, the paper clearly concludes that ICTs facilitate economic growth, principally by providing incentives for capital deepening and increasing productivity through rapid technological progress. However, the impact on growth is more extensive from the long-term ICT use and networking that though requires appropriate ICT investment and complementary efforts in order that spillovers and productivity improvements are triggered and exploited totally. This paper derives the key determinants and interacting factors that, in the corresponding correct synergic combination, promote ICT’s impact on growth-generating processes. For a variety of reasons, the states of these factors in developing countries provide a less ICT- favourable environment for taking advantage from ICTs. These economies exhibit a lower stock of human capacities and per capita capital to trigger the productivity benefits from the ICT use. Therefore, the level of effort is higher than in the developed world to receive return on ICT investment. However, when they achieve to attract capital and knowledge by encouraging ICT investment and technology transfer supported by international openness, maintained financial and institutional systems, deregulation of markets and higher competition, they have the chance to benefit from adopting best practices and technologies from the industrialized world with complementary efforts in the reorganisation of business organisations and processes and enhanced human ICT-skills and management.

LIST OF FIGURES AND TABLES

Figure 1: The world economy: rate of economic growth in percentage by economy and period

Figure 2: Total ICT investment worldwide by region (in millions of dollars)

Figure 3: Structure and built-up of the paper

Figure 4: Development process of technological change and inducing factors

Figure 5: ICT’s effect on economic growth through three channels

Figure 6: ICT’s stages of effect on growth via ICT-producing and ICT-using sector .

Figure 7: Economic growth in per cent by economy decomposed in sources, 1995 - 1999; 2000 - 2004

Figure 8: ICT capital contribution to economic growth in per cent by region

Figure 9: Variance in ICT capital contribution to economic growth in per cent for the 50 major ICT spending countries

Figure 10: Sources of labour productivity growth in per cent, EU-15 and U.S., 1987- 2004

Figure 11: Relationship between ICT-capital deepening contribution and non-ICT production TFP growth contribution to labour productivity growth in per cent, U.S. and EU-15, 2000 - 2004

Figure 12: ICT-related sources of German labour productivity growth in per cent, Germany 1991-2003

Figure 13: Contributions to Labour Productivity Growth in per cent, EU-15, U.S. and CEE, 1995-2003

Figure 14: Components of contribution to Economic Growth in the major Asian ICT spending economies in per cent, 1995 -1999

Figure 15: ICT investment by industry sector and region; 2005 (in million of Dollars)

Figure 16: ICT investment per employer by region and year; 2001 - 2005 (as a percentage of ICT investment per employer of North America in 2005)

Figure 17: Top economies in value added in the ICT sector (as a percentage of total business sector value added)

Figure 18: Mobile phone penetration by region and level of development (users per 100 inhabitants)

Figure 19: Mobile phone users by region and level of development

Figure 20: Internet penetration by region and level of development (Internet users per 100 inhabitants)

Figure 21: Internet users by region and level of development

Figure 22: Correlation between GDP per worker and ICT investment per worker; 2005 (in million per US$)

Table 1: World Bank income group categories, 2004

Table 2: Indicators of ICT affordability by income group

LIST OF ABBREVIATIONS

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1 INTRODUCTION

Economies around the globe differ extremely regarding their rates of economic growth. The developed world steadily grows at high levels of national income¹. In some developing countries, e.g. Developing Asia, extraordinary high growth rates can be identified (see Figure 1), in contrary to the rest - there is a widening economic divide.

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Figure 1: The world economy: rate of economic growth in percentage by economy and period

Source: Estimation from Jorgenson and Vu (2007)

This disparity is not a result of a coincidence, but rather the consequence of several interacting factors, which are given by the economic and political environment. The economic situation depends on the capabilities of an economy to produce valuable products and services efficiently. The general literature suggests that the key to accelerate economic growth is the creation of more productive labour². Theoretically, the substantial source of the long-term growth rate of real per capita economic output is the increase of the rate of productivity growth that primarily arises from technological progress and innovation, knowledge and human capital accumulation, research and development activities (henceforth R&D), learning-by-doing processes, and spillover effects. However, the impact of these factors depends on the establishment of essential conditions that trigger processes for long-term growth, such as certain levels of physical and human capital, political rights and governmental regulations, competitive oriented market structures and appropriate infrastructure¹. The enormous variety of capabilities of Information and Communication Technologies (henceforth ICT) has revolutionized growth opportunities that lower the operation efforts needed for establishing the foundation for sustainable growth and enormously facilitate enhanced productivity improvements afterwards.

Figure 2: Total ICT investment worldwide by region (in millions of dollars)

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Source: Calculation based on WITSA (2006)

As a result of the accelerated technological progress and permanent price declines of ICT since the mid-1990s, the last decade was marked by rapid diffusion of ICT throughout the world, especially all over the developed nations. ICT has gradually conquered many various parts of social life and economic processes, e.g. the mobile phone penetration rate averagely exceeds the 95 per cent point and the average worker and household in the developed world features at least one personal computer with access to the Internet, of which a considerable share even uses broadband and wireless access¹.

ICT’s potential has enforced the business world to substitute and modify conventional capital and labour. Though the concomitant slowdown in economic growth has hindered the euphoria, ICT investment and application have increased substantially in both developed and developing countries, but to lesser extent and lower level in developing regions, such as Latin America, Middle East, Africa and Eastern Europe (see Figure 2).

Nevertheless, due to the relative high ICT investment and use, economic processes and trade are more and more influenced by the creation, dissemination, accumulation, processing and application of information and knowledge. ICT’s multidimensional capabilities facilitate extensive innovations in products and processes, and thus lead to a more productive exploitation of capital and labour. ICT’s wide scattered application allows new business models and management practices, new products embedding ICT, easier expansion to global markets and ICT-enabled emergence of new markets. Moreover, the impact is even more far-reaching through spillovers induced by ICT- based networking, and has been much increased by the Internet. Through the diffusion of ICT, transaction costs are reduced and facilitate more productive ways of interaction between businesses and division of labour worldwide. Furthermore, ICT allows an easier interchange of international innovators and dissemination of new technologies, and thus accelerates the invention and circulation of new ideas that in turn trigger further technological change. Due to these network effects the impact of ICT increasingly grows crossing the threshold of ICT uptake and becomes more important than ICT investment and production with regard to contribution to economic growth.

The dramatic alteration of economic conditions by use of ICT challenges governmental regulation systems permanently. Considering the “World Summit on the Information Society” (WSIS) of the United Nations and various global governmental reformations towards ICT-based regulations confirms the importance of ICT and its wide recognition as an economic significant determinant. After the early over-ambitious believe in ICT as the panacea for economic development and growth, it has been finally realized that ICT is not the solution, but an effective tool for fostering economic growth that can make a significant contribution to more efficient growth processes. By now, “…no one has any doubt that ICT have had a significant impact on most countries in the world, especially in the ways of communication, working, and learning¹ ”.

With the arrival of the widely accepted technological revolution, economists have questioned the extent of ICT impact on economic growth. Several studies in the developed world have confirmed the significant contribution to the performance of a country’s economy. Measuring and justifying the economic impact of ICT on growth and productivity has been the subject of an intense investigation during the last decade. Examining the contribution of ICT to growth and productivity was initiated by studies of Oliner and Sichel (2000) and Jorgenson and Stiroh (1995, 1999). Mainly, this interest was stirred up by the extraordinary degree of continuously high economic growth rates that occurred in the United States between 1992 and 2004. After that, a series of studies followed analyzing individual countries and industrial sectors, such as recently Ark and Inklaar (2003, 2005), Ark and Piatkowski (2004), Piatkowski (2006), Jorgensons and Vu (2007), Bloom, Sadun and Reenen (2006), Crespi, Criscuolo and Haskel (2006), Eicher and Roehn (2007) and Stiroh and Botsch (2005) and find persuasive evidences for ICT’s significance for growth and productivity increases.

The theoretical and empiric evidences suggest that ICT production and diffusion generates significant growth returns in both industrial and developing countries, but less in countries lacking in finance for ICT-related investment, skills in the labour, ICT- producing and service sector and an ICT-friendly policy environment. ICT has a far reaching multi-dimensional effect on determinants of growth variedly strong and time- varying. ICT affects through three occurring macroeconomic channels that imperatively require complementary efforts by industry and policy to stimulate the impact. The first channel widens directly the capital deepening by investment in ICT but surges growth only in the short-term, however, it is a prerequisite that establishes the base for the ICT usage. The second direct channel stimulates the Total Factor Productivity (henceforth TFP) growth in the ICT sector induced by accelerated technological advances. The latter two channels require appropriate high per worker capital to be triggered and the extent of impact is particularly strong in combination with a high stock of R&D activities and associated subsidies, international openness and reduction of regulatory barriers. The third more comprehensive channel impacts the overall TFP growth by ICT use and positive spillover effects that create TFP increases throughout the entire economy. The more ICT diffuses and is applied, the more network effects lead to cross firm integration and facilitate technological progress and innovations biased by extreme knowledge accumulation. Successful exploitation of ICT utilization requires complementary efforts in building up a high stock of human capital and reorganisation, such as changes in human resource management practices and organizational structures, for adopting new knowledge or technologies respectively.

However, the macroeconomic differences in developing countries give reason to assume that the impact channels of ICT do not affect in the same extent and pace like in the developed world due to missing preconditions. The prime challenge now is to understand how ICT should be deployed properly under the prevailing conditions in developing economies to benefit from ICT. Unfortunately, most of the research on ICT’s impact has focused on developed countries, primarily due to reasons of statistical data availability and early awareness of ICT’s extent of potential, but nevertheless provide valuable conclusions for the magnitude and dynamic effects of ICT. However, recently a few have evaluated the potential of ICT in the developing world and examined the specific possibilities for economic growth, e.g. Waverman, Meschi and Fuss (2005), Vu (2005) and Ark and Piatkowski (2004), Piatkowski (2006) and Lee (2003). Apparently, the developing countries only partly succeed to benefit from ICT’s potential to boost their economic growth and thus even the digital divide within the developing world is expanding.

Many developing countries are still far away from having fully exploited the benefits of ICT. But even though they are lagging behind with regards to the size of the ICT sector, integration of ICT in the service and manufacturing sector and an appropriate ICT environment, they would have lower costs and fewer risk of making errors identified by experiments and research. They have the opportunity to look overseas and directly adopt state-of-the-art technologies and Best Practice strategies for business and regulation strategies. However, the research still confirms the huge potential of ICT in the developing world. But these countries face a major obstacle in accumulating capital for increasing their level of per capita economic output. Since ICT tends to be only complementary tool to existing practices, the developing world needs to attain a certain level of conventional capital and public infrastructure, e.g. education, health services, roads, rather to substitute them. They have to understand that ICT enhances the traditional infrastructure and implementation strategies must be accompanied by international openness, less regulated business environment, higher competition, security and maintained solid financial and regulation system.

The object of this work is to offer a contribution in the field of investigating the impact of ICT on the economic growth in developing economies. By examining an integrated summary of growth theory, ICT’s macroeconomic and empirical efficacy and corresponding implications, the work provides persuasive facts about ICT’s economic impact that are of special interest for developing economies holding a share of ICTproducing sector and for those which only use ICT.

Figure 3: Structure and built-up of the paper

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Therefore, the paper surveys the contributions from the neoclassical and endogenous theories of growth in respect of ICT’s role and reviews empirical evidences for links between ICT and economic growth to conclude implications for the developing countries. Thereupon, chapter 2 of this investigation prepares the main sources of growth, investigates processes and associated growth-inducing determinants. Chapter 3 deals with determining the macroeconomic effect channels of ICT and their extent of contribution to growth derived from empiric studies. In the end of chapter 3, the paper discusses the relevant factors for triggering and fostering the contribution of ICT to growth. Chapter 4 derives ICT related implications from the findings of Chapter 2 and 3 on the base of a statistical analysis of the current state of ICT in developing countries. Special regard is paid to the question whether similar impacts as in the developed world can be expected in the different economic circumstances of the developing world and whether implications from the developed world require adjustments for the current environment of less industrialized economies (see Figure 3).

2 ICT AND THE GROWTH THEORY

This chapter investigates the role of ICT for economic growth through accelerating and reinforcing the surge of growth-inducing forces theoretically. Primarily, on the subject of this question it is imperative to determine the sources of growth and to examine the link between those and ICT as a technology and a sector. Particularly with regard to the arrived migration period to an Information Economy, this chapter incorporates potential ICT-amplifying growth-generating processes, such as ICT-related capital deepening, technological innovation, diffusion and adoption of ICT, knowledge and human capital accumulation, research and development activities, and spillover effects.

This chapter is organized as follows. The next section 2.1 discusses the relevance of growth for an economy and clarifies the definition of the main object of this investigation that is the growth of the economic output. The main part of this chapter, section 2.2, looks into the issue of integrating ICT and associated enhanced growth- causing mechanisms into growth models, in particular, the neoclassical model and the newly appeared endogenous growth theory. The concluding section 2.3 discusses the theoretical implications.

2.1 Measurement of Economic Growth

Economic growth is defined as the change in percentage of the economic power of a region within a period compared to the prior¹. The economic power is the market value of all final goods and services produced by an economy in a given period of time. The change is customarily measured as the annual percentage rate of increase in gross domestic product, or GDP. There is a distinction between real and nominal GPD. In addition to the calculation of the nominal GDP, the real GDP considers inflation- adjusted terms, in order to net off the effect of inflation on the price of the goods and services produced. This correction of inflation is made by deducting the rate of change of the price index from the rate of the economic growth. Hence, this concept is more meaningful, because hereby the growth of potential output is measured instead of mirroring increasing prices. However, the correct estimation of a price index has to consider qualitative-related price changes, which stand for growth rather than price increase. Terminologically, economic growth is also distinguished between extensive and intensive growth calculation. For the extensive calculation the increase of the GDP is considered solely without accounting the enlargement of per capita goods available for the economy’s population. Therefore, the determination of the intensive economic growth is often used by dividing the applied GDP by the number of population.

A specific characteristic of economic growth is its exponential behaviour¹. Over long periods of time, even small rates of annual growth can have large effects through compounding. A growth rate of 2.5% per annum will lead to a doubling of GDP within 28 years, whilst a growth rate of 8% per annum, experienced by some Asian countries, will lead to a doubling of GDP within 9 years. The world economy has experienced the crucial tiny difference in the rate of economic growth since 1995². The per capita growth rate went up one per cent point from 2.72 percent during 1989-1995 to 3.73 percent in 1995-2000 and after 2000 a higher growth was sustained at a rate of 3.75 percent. The significance of more rapid growth emphasises that per capita growth of 2.72 percent doubles world economic output by four times in a century, while 3.75 percent doubles output more than five times per century.

The economic growth is often used as an indicator of the increase rate of the economy’s welfare, and growth rate of the real GDP per capita therefore is often considered as representing an increase in the average standard of living. However, a closer economic examination disagrees with this opinion. First of all, it does not provide any information regarding the distribution of the income in a country. Negative externalities from pollution consequences to economic growth are not yet taken into account. Real GDP ignores positive externalities that may result from services such as education or health care, and furthermore welfare-raising criteria like cost-free leisure activities. However, for the purposes of economic growth in the long run it tends to be a very good indicator. There is no other indicator in economics which is as universal or as widely accepted as the GDP.

A reasonable comparison of the economic growth of at least two countries is not as easy as it seems. The level of GDP in different countries is compared by converting their value in national currency according to either the current exchange rates or the purchasing power parity exchange rate. The current exchange method uses the global current currency exchange rates. Though there are often strong fluctuations, this method offers a good indicator to compare the economies international purchasing power and relative economic strength. The purchasing power parity method indicates the domestic per capita purchasing power relative to the country’s GDP and local good prices. This method compensates the weakness of the currency in the world market and helps indicating the stand of living.

Since there is no noteworthy local price difference of high technology goods, like ICT, and which is a traded good on international markets, the current exchange method advises a much better idea about the different countries’ purchasing power opportunities to invest in ICT. The here introduced varities of measurement of economic output are applied in the further work according to the relevant view in the particular context.

2.2 Theories of Economic Growth

In the beginning the classical economists like Smith, Ricardo, Ramsey and Schumpeter provided fundamental approaches to the growth theory¹. The theory implicated the valuable conclusion that capital can not sustain growth indefinitely due to the diminishing marginal rate of productivity and its relation to the accumulation of physical and human capital. Also essential conclusions were found about the interplay between income per capita and growth rate of the population and mandatory effects of technological progress and the discovery of new productions methods. Afterwards, Harrod and Domar tried to combine the growth theory with the Keynesian analytic and declared capital as the only driving factor of growth and focused on cyclical fluctuations, instead of asking themselves about the determinants of growth². Due to the hardly to find application in the literature and missing determinant of technological progress in the Harrod-Domar-Model, a further investigation in respect of ICTs impact is not meaningful.

In the 1960s, growth theory consisted principally of the neoclassical model. The major contribution of Solow (1956) and Swan (1956) was a production function assuming constant return on scales, diminishing returns on capital and an exogenous technological explanation for per capita growth in the long-term. Over the past decades, seminal contribution by Romer (1990) and Aghion and Howitt (1992) led to new breakthroughs in the growth theory and the foundation of the endogenous growth theory that contains the endogenization of technological change in the model.

The next section examines the neoclassical growth model by Solow (1956) and Swan (1956), which delivers supportive macroeconomic implications in regard to ICT’s impact. The section 2.2 reviews the contributions from the initial endogenous growth model by Romer (1990) and upgrades in order to characterize the interface through which the Information Age affects the economic growth. The following investigation on economic growth puts emphasis on examining the sources of growth and associated growth processes to make ICT relevant conclusions in section 2.3.

2.2.1 Neo-classical Growth Model

The first attempts to model long-run growth analytically were in the 1960s. Growth theory consisted mainly of the neoclassical model developed by Solow (1956) and Swan (1956).

The neoclassical theory applies a macroeconomic production function.¹ The output depends on input as factors of production consisting of accumulation of capital and labour at a given time-dependent technology variable representing the technological progress. Capital accumulation is in turn determined by the savings rate (the proportion of output used to create more capital rather than being consumed) and the rate of capital depreciation. The ratio between saving and consumption can be stimulated by investment-inducing measures by policy or subsidies. The model assumes that countries use their resources efficiently, that there are diminishing returns² to capital and labour increases and constant returns to scale.

Subsequently, the neo-classical model makes several important predictions.¹ First, beginning at a low level of capital per capita, the increase of per worker capital creates economic growth in the short-run, since the greater their equipment with capital, the more productive is the labour. Additionally, the meaning of capital can be usefully broadened to include education, training, experience and health consolidated in human capital. The ratio of human to physical capital in an economy tends to settle down to a steady-state. Hence, an economy with a high initial ratio of human to physical capital ought to grow rapidly, because physical capital can be exploited more efficiently and is more amenable than human capital to rapid expansion. This would imply that movement of capital to countries lagging human capital, e.g. transfer and adoption of new technologies across economies, is only effective by a complementary investment in an appropriate endowment and training of labour.

Furthermore, the neoclassical model’s central idea of the convergence, that is derived from the diminishing returns to capital, predicts that the per capita economic output of poorer countries grows faster, however, assuming that all economies were intrinsically the same, except their starting capital intensities. The lower the starting level of real per capita GDP in relation to its long-run or steady-state position, the higher is the predicted growth rate. This feature of the model received strong support from empirical work in the recent years, i.e. for Japan or Republic of Korea. However, whether convergence occurs or not depends on the region’s characteristics.² Due to the fact that characteristics may vary across economies in regard of for instance government policy, levels of human capital, propensities to save and have children, willingness to work and access to technology, the convergence rule applies conditionally.

A further prediction of the Solow-Swan-Modell is that the long-run per capita growth is supposed to cease eventually in absence of continuing improvements of the prevailing technology, which causes productivity increases and avoids the diminishing of the return to capital.³ Economies tend to converge to a constant steady-state of per worker output at which no new increase in capital per unit of effective labour will create economic growth. Thus, all capital deepening associated mechanisms affect only the steady-state level of economic output, but not the long-run growth rate. In 1960s, economists recognized this deficiency in the model and argued that the discovery of new ideas was the only way to avoid diminishing returns. Subsequently, the model was patched up by assuming that technological progress occurred in an unexplained manner. According to this, the long-run per capita growth rate is exogenously determined by productivity increases via technological progress solely¹. But the assumption that technological progress is exogenous would mean that across all countries exist the same technological opportunities and should converge to the same steady-state per capita growth in the long-run. Nevertheless, the Solow-Swan-Model gives reason to assume that in the very long-run capital accumulation is less significant than technological innovation. Accordingly, assuming the short-run rate of growth slowed down to a steady state due to diminishing returns, the per capita output is growing entirely at the rate of technological progress in the steady-state. This effect of growth is also known as the rate of productivity growth and is measured as the TFP (Total Factor Productivity)².

The neoclassical model provides several vague conclusions for the significance of the examined technological innovation ICT for growth.

- ICT-based capital deepening is relevant to endow the labour with appropriate factor of production that allows the labour to work efficient at given conditions in the short-run. Nonetheless, the marginal product of the ICT capital diminishes in the long-run.
- ICT transfer across economies is only effective if it is accompanied by corresponding ICT-related training and education that higher the stock of human capital for efficient adoption. Technology and knowledge exchange between countries with high educated people, e.g. developed countries, diffuses faster and is easier adopted.
- The convergence prediction suggests that ICT capital deepening in economies with a low level of per capita economic output should initially grow at high rates, e.g. as it happened in some ICT exporting developing economies like Taiwan, Singapore, Malaysia and Thailand¹.
- The conclusion that technological innovation is the driving force for growth in the long-run implies that such an innovation-triggering technology like ICT is supposed to boost the long-run economy growth enormously.

Unfortunately, the investigation of ICT impact by the neoclassical model encounters the problem concering the unexplained manner of technological change. For bridging the blocking situation, it is necessary to investigate the endogenous growth theory in the next section in order to find stylized factors on the ICT’s impact.

2.2.2 Endogenous Growth Theory

Due to the urge to explain divergences in growth of countries in the long-term the theory of growth reappeared as the so-called endogenous growth theory in the last decades. On the foundation of the seminal approaches from Romer (1990) and Aghion and Howitt (1992), recently a number of growth models were set up that focus on endogenous growth processes stemming from the usage of ICT. Vourvachaki (2006) determines ICT-enabled spillovers through the use of ICT as the main driver of growth. For Venturini (2007) learning-by-doing processes facilitated by ICT utilisation are the major determinants. Bianco and Van Zon (2005) identified embodied technological change initiated by technological advances in the ICT as mainly responsible for growth and Chen and Kee (2005) show a link between the growth rate of human capital and economic growth via knowledge accumulation.

In general, the endogenous growth theory starts the attempt to tie up to the unsatisfactory shortcoming of the exogenous explanation of long-run growth in the neo- classical model. By building macroeconomic models out of microeconomic foundations, the growth models developed by Romer (1990) and Aghion and Howitt (1992) mainly provide an approach, whereby growth is driven by technological change that is stressed by an innovations process based on human capital and R&D. In contrast to the neoclassical model, the seminal contribution is that the growth of technological progress is model-endogenously explained and involves growth-generating processes that prevent diminishing marginal products of physical and human capital.

The process of technological change in the endogenous growth model bases on three premises.¹ The first premise states that technological advance is the outcome of the creation of new knowledge that enables a higher output at a given input in the production process.

The second premise focuses on that, the model considers new knowledge either as a result of economic decisions made by profit-maximizing agents² to invest in purposive R&D efforts, or an occurrence from external effects, such from random unintended fall- outs by other activities or knowledge spillovers. The latter referring to knowledge spillovers was already described by Arrow and Sheshinski as a mechanism called learning-by-doing³, where by-product discoveries immediately spill over to the entire economy⁴.

In contrast to that, in accordance to the third premise, the endogenous growth theory extinguishes that knowledge only diffuses restrictedly, due to the fact that it possesses some characteristics of a public good⁵. Even through it is non-rival⁶, knowledge is only partially excludable⁷. Non-rivalry implies that once knowledge has been created it can be applied by everyone as often as desired and therefore increases (as a factor of production) the returns to scale. However, partial excludability means that the acquirement of knowledge is associated with effort. Partial excludability implies only a costly and gradually dissemination throughout the economy. In addition, it is significant to have in mind the second premise that leads regulation systems to maintain the highest level of excludability of knowledge by means of e.g. patents and Intellectual Property Rights (IPR) to create incentives for R&D efforts. In spite of that, the model suggests that an enduring protection of knowledge creates incessant monopolistic positions that conflict with the theory of perfect competition and, furthermore, hinders innovators to access and use knowledge for further innovation and technological progress. Thus, the Romer-Model loosens the assumption of perfect competition and allows a degree of temporal ex-post monopoly power¹. Only by that R&D spending, which underlies the creation of knowledge, receives the appropriate compensation and reward². After the expiration of the temporal protection, imitators follow the innovative pioneers, having the advantage of saving own R&D efforts, and the perfect competition is recovered.

Still, the companies and innovators face the obstacle of the partial excludability of knowledge. The following remarks based on the third premise give an understanding of the main determinant of the rate of growth³. It helps to have in mind how new knowledge or ideas arise. The majority of innovations results from intended R&D activities that provide designs for productivity improvements in the production process, which finally lead to growth. However, knowledge and the process of discovery are closely tied to a human body. Subsequently, economic growth of an economy depends indirectly via an innovation process on the stock of human capital and the ability to accumulate knowledge, e.g. size of the R&D sector and educated researchers. In turn, the creation of knowledge requires that the innovator can access and conceive the up-to- date knowledge. Therefore, a sufficient degree of human capital in the R&D sector must be available. Human capital is also significant for the adoption of knowledge in the labour of companies. The utilisation of new technologies for productivity increases is associated with more or less corresponding adaptation efforts, e.g. in education, business organisation and policy regulations, that allow the efficient operation. By the end, indeed, these latter points of discussion give reason to assume that capital deepening for endowing and educating the innovators is the precondition for the activation of the knowledge creation and again capital deepening related to the knowledge is indispensable in the industry to transform the knowledge into technologies and maintain the labour skills for adoption abilities.

[...]

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¹ Worldbank (2007b): Here the term “developed world” refers to high income economies.. In 2006, the GDP (current US$) of these countries accounted averagely for 36,6 trillion dollars, in contrast, the rest of word could exhibit an average GPD (current US$) of 11,6 trillion dollars.

² cf. Ark (2006)

¹ cf. Barro (1997), pp. 12 - 71

¹ Calculations based on United Nations (2006)

¹ Vu (2005), pp. 3

¹ cf. Frenkel and Hemmer (1999), pp. 1 et sqq.

¹ cf. Barro and Sala-i-Martin (1998), pp. 1 - 4

² cf. Jorgenson and Vu (2007), pp. 1 - 29

¹ cf. Barro and Sala-i-Martin (1998), pp. 11 - 16

² cf. Frenkel and Hemmer (1999), pp. 27 and cf. Barro ans Sala-i-Martin (1998), pp. 11, 12

¹ cf. Solow (1956) and Barro and Sala-i-Martin (1998), pp. 17 et sqq.

² Diminishing returns implies that at some point the amount of new capital produced is only just enough to make up for the amount of existing capital lost due to depreciation.

¹ cf. Barro (1997), pp. 5 - 12

² cf. Barro (1997), pp. 2

³ cf. Barro (1997), pp. 5 - 15

¹ cf. Barro and Sala-i-Martin (1998), pp. 14 - 15: The long-run growth rate of the level of output depends also on the growth rate of population, another element that is exogenous in the standard theory.

² cf. Solow (1956): TFP growth is then defined as the actual output growth minus the growth rates of capital and labour stocks, weighted by their contribution to output. It represents a measure of the efficiency with which capital and labour are combined to produce output.

¹ cf. Qiang and Pitt (2004), pp. 12

¹ cf. Romer (1990), pp. 78 - 89

² The premise here is that incentives in a competitive economy market nonetheless play an essential role in the process whereby new knowledge is translated into goods with practical value.

³ cf. Barro and Sala-i-Martin (1998), pp. 170 - 177

⁴ cf. Barro (1997), pp. 6

⁵ cf. Romer (1990), pp. 73 - 77

⁶ A purely rival good has the property that its use by one consumer precludes its use by another. A purely non-rival good has the property that its use by one consumer in no way limits its use by another one.

⁷ A good is excludable if the owner can prevent others from using it.

¹ cf. Romer (1990), pp.78 - 89

² cf. Barro (1997), pp. 7

³ cf. Romer (1990), pp. 73 - 77