Conclusion
In this chapter we argued that the endogenous growth model with quality-improving innovations provides a framework for analyzing the determinants of long-run growth and convergence that is versatile, simple and empirically useful.
Versatile, as the same framework can be used to analyze how growth interacts with development and crosscountry convergence and divergence, how it interacts with industrial organization and in particular market structure, and how it interacts with organizations and institutional change. Simple, since all these aspects can be analyzed using the same elementary formalization. Empirically useful, as the framework generates a whole range of new microeconomic and macroeconomic predictions and also stands up to empirical criticisms better than other endogenous growth models in the literature.Far from closing the field, the chapter suggests many avenues for future research. For example, on growth and convergence, more research remains to be done to identify the main determinants of cross-country convergence and divergence.[35] Also important, is to analyze the role of international intellectual property right protections and foreign direct investment in preventing or favoring convergence. On growth and industrial organization, we have restricted attention to product market competition among existing firms. But what can we say about entry and its impact on incumbents’ innovation activities?[36] On institutions, we have just touched upon the question of how technical change interacts with organizational change. Do countries or firms/sectors actually get stuck in institutional traps of the kind described in Section 6? What enables such traps to disappear over time? How do political economy considerations interact with this process? There is also the whole issue of wage inequality and its interplay with technical change, on which the Schumpeterian approach developed in this chapter can also shed light.[37]
If we just had to select three aspects or questions, so far largely open, and which could also be explored using our approach, we would suggest the following.
First, on the role of basic science in generating (very) long-term growth. Do fundamental innovations (or the so called “general purpose technologies”) require the same incentive system and the same rewards as industrial innovations? How can one design incentive systems in universities so that university research would best complement private research? A second aspect is the interplay between growth and volatility. Is R&D and innovation procyclical or countercyclical, and is macroeconomic volatility always detrimental to innovation and growth? Answering this question in turn opens up a whole new research topic on the macropolicy of growth.[38] A third aspect is the extent to which our growth paradigm can be applied to less developed economies. In particular, can we use the new growth approach developed in this chapter to revisit the important issue of poverty reduction?[39]Finally, in this chapter we have argued that modelling growth as resulting from quality-improving innovations, provides a natural framework to address a whole array of issues from competition to development, each time with theoretical predictions that can be empirically tested and also lead to more precise policy prescriptions. However, one might think of more direct ways of testing the quality-ladder model against the variety model analyzed in the other chapters. For example, in current work with Pol Antras and Susanne Prantl, we are using a panel data set of UK firms over the past fifteen years, to assess whether variety had any impact on innovation and growth. Using input-output tables, our preliminary results suggest that exit of input firms has but a positive effect on the productivity growth of final producers.
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