North-South Trade-Related Technology Diffusion: Virtuous Growth Cycles in Latin America

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1 DISCUSSION PAPER SERIES IZA DP No North-South Trade-Related Tehnology Dffuson: Vrtuous Growth Cyles n Latn Amera Maure Shff Yanlng Wang May 2010 Forshungsnsttut zur Zukunft der Arbet Insttute for the Study of Labor

2 North-South Trade-Related Tehnology Dffuson: Vrtuous Growth Cyles n Latn Amera Maure Shff World Bank and IZA Yanlng Wang Carleton Unversty Dsusson Paper No May 2010 IZA P.O. Box Bonn Germany Phone: Fax: E-mal: [email protected] Any opnons expressed here are those of the author(s) and not those of IZA. Researh publshed n ths seres may nlude vews on poly, but the nsttute tself takes no nsttutonal poly postons. The Insttute for the Study of Labor (IZA) n Bonn s a loal and vrtual nternatonal researh enter and a plae of ommunaton between sene, polts and busness. IZA s an ndependent nonproft organzaton supported by Deutshe Post Foundaton. The enter s assoated wth the Unversty of Bonn and offers a stmulatng researh envronment through ts nternatonal network, workshops and onferenes, data serve, projet support, researh vsts and dotoral program. IZA engages n () orgnal and nternatonally ompettve researh n all felds of labor eonoms, () development of poly onepts, and () dssemnaton of researh results and onepts to the nterested publ. IZA Dsusson Papers often represent prelmnary work and are rulated to enourage dsusson. Ctaton of suh a paper should aount for ts provsonal harater. A revsed verson may be avalable dretly from the author.

3 IZA Dsusson Paper No May 2010 ABSTRACT North-South Trade-Related Tehnology Dffuson: Vrtuous Growth Cyles n Latn Amera * Ths paper examnes the mpat on TFP n Latn Amera and the Carbbean (LAC) and n other developng ountres (DEV) of trade-related foregn R&D (NRD), eduaton and governane. The measures of NRD are onstruted based on ndustry-spef R&D n the North, North-South trade patterns, and nput-output relatons n the South. The man fndngs are: ) eduaton and governane have a muh larger dret effet on TFP n LAC than n DEV, whle the opposte holds for the North s R&D; and ) eduaton and governane have an addtonal mpat on TFP n R&D-ntensve ndustres through ther nteraton wth NRD n LAC but not n DEV. These nteraton effets mply that nreasng the level of any of the three poly varables eduaton, governane or openness result n vrtuous growth yles. These are smallest under an nrease n trade, eduaton or governane, are stronger under an nrease n two of these three poly varables, and are strongest under an nrease n all three varables. JEL Classfaton: F15, O19, O33 Keywords: trade, tehnology dffuson, growth, Latn Amera Correspondng author: Maure Shff DECRG (MC3-303) World Bank 1818 H Street NW Washngton, DC USA E-mal: [email protected] * We would lke to thank Danel Lederman for omments on an early verson of the paper. The opnons expressed n ths paper are those of the authors and do not neessarly represent those of the World Bank, ts Board of Dretors, or the governments they represent.

4 1. Introduton Ths paper ams to examne the mpat of poly on the nternatonal dffuson of tehnologal knowledge n Latn Amera and the Carbbean (LAC). In prnple, nternatonal dffuson an our through varous hannels, nludng trade, FDI, lensng, attendng onferenes, aess to sentf journals (say, through the nternet), and other soures of ross-border ommunaton. The man hannels that have been studed are trade and FDI, and ths paper fouses on the role of nternatonal trade. In addton to trade, we also examne the mportane of eduaton and governane for produtvty and for the mpat of foregn R&D and openness on produtvty. Eduaton s lkely to play an mportant role beause of ts mpat on the apaty to absorb tehnologal knowledge n general and nnovatons n partular. Governane s also lkely to be mportant beause problems of governane suh as orrupton, delays n obtanng requred permts, and general admnstratve weakness (partly to low pay of publ setor employees whh attrats lower-ablty ndvduals or able ones who then work elsewhere to make ends meet) would redue the mpat on TFP of the dffuson of tehnology and the nvestments and tranng needed to adapt the new tehnologes to loal ondtons. Grossman and Helpman (1991) explore endogenous growth theory n an open eonomy settng. They argue that a ountry s produtvty rses wth ts trade volume. As goods embody tehnologal know-how, ountres an aqure foregn knowledge through mports. Coe and Helpman (1995) provde an empral mplementaton of the open eonomy endogenous growth model. They onstrut an ndex of foregn R&D as the trade-weghted sum of tradng partners stoks of R&D. They fnd for a sample of 1

5 developed ountres that both domest and foregn R&D have a sgnfant mpat on TFP, and that the latter nreases wth the general degree of openness of the eonomy and wth openness towards the larger R&D produng ountres. Coe et al. (1997) examne the same ssue for developng ountres. They fnd that developng ountres beneft more from foregn R&D spllovers, the more open they are and the more sklled s ther labor fore. These fndngs provde support for the hypothess that trade s an mportant mehansm through whh knowledge and tehnologal progress s transmtted aross ountres. Ths paper bulds on Shff et al. (2005). That paper expanded the work of Coe and Helpman (1995) and Coe et al. (1997) by examnng these ssues at the ndustry level. The dea s that mportng ountres learn from the knowledge embedded n the nputs that they mport. As s shown n Seton 2 below, our measure of the stok of foregn R&D obtaned by an mportng ountry at the ndustry level expltly norporates the produton struture of the eonomy as refleted n the nput-output relatonshps. Ths paper spefally examnes the mpat on TFP of trade-related nternatonal tehnology dffuson, eduaton and governane for the LAC regon. The remander of the paper s organzed as follows. Seton 2 sets forth the empral mplementaton, Seton 3 desrbes the data, and Seton 4 presents the results. Seton 5 onludes. 2. Empral Implementaton Coe and Helpman (1995) estmate the mpat on TFP of domest and foregn R&D for OECD ountres. Due to lak of domest R&D, ths paper fouses on 2

6 estmatng the mpat on TFP of foregn R&D. Ths s unlkely to have a sgnfant mpat on our results beause most of the world s R&D s performed n developed ountres. 1 We estmate TFP equatons wth pooled data, for a panel of 25 developng ountres and 16 manufaturng ndustres. At the ndustry level, the stok of foregn R&D avalable n ndustry of developng ountry, NRD, s defned as: M jk NRD aj RDj = aj RD jk, (1) j j k VAj where (k) ndexes developng (OECD) ountres, j ndexes ndustres, M (VA) (RD) denotes mports (value added) (R&D), and a j s the mport nput-output oeffent (whh measures for ountry the share of mports of ndustry j that s sold to ndustry ). ndustry, The frst part of equaton (2) says that, n developng ountry, foregn R&D n NRD, s the sum, over all ndustres j, of through mports from OECD ountres, multpled by a j RD j, the ndustry-j R&D obtaned, the share of mports of ndustry j that s sold to ndustry. The seond part of equaton (2) says that RDj s the sum, over OECD ountres k, of M jk VA j, the mports of ndustry-j produts from OECD ountry k per unt of ndustry-j value added (.e., the blateral openness share), multpled by RD jk, the stok of ndustry-j R&D n OECD ountry k. 1 In 1990, 96% of the world s R&D expendtures took plae n ndustral ountres (Coe et al., 1997). Moreover, reent empral work has shown that muh of the tehnal hange n OECD ountres s based on the nternatonal dffuson of tehnology among OECD ountres. For nstane, Eaton and Kortum (1999) estmate that 87% of Frenh growth s based on foregn R&D. Sne developng ountres nvest muh fewer resoures n R&D than OECD ountres, foregn R&D must be even more mportant for developng ountres as a soure of growth. 3

7 We also examne the mpat of eduaton and governane. We would expet eduaton and governane to have a postve effet on TFP. A hgher qualty of governane enables a more effent alloaton of resoures and a hgher TFP. And a hgher level of eduaton mples a more produtve labor fore and a hgher level of TFP. The baselne estmated equaton s: lntfp t β + β ln NRD + β E + β G = 0 N t E t G + β t Dt + β D + β D + ε t, (2) t where E (G) denotes eduaton (governane), and D t (D ) (D ) represents tme (ountry) (ndustry) dummes. We further examne how the mpat of NRD vares wth ndustres R&D ntensty. We dvde the ndustres nto two groups aordng to ther R&D ntensty. The groupng of the ndustres n the two lusters and ther R&D ntensty--s shown n Seton 3. Equaton (2) beomes: lntfp t = 0 ( β N + γ N DR) ln NRDt + β E Et β GG β β t Dt + β D + β D + ε t ; (3) t where DR = 1 (0) for hgh (low) R&D-ntensty ndustres. We also estmate equaton (3) wth DR replang β D. These equatons are estmated the 9 LAC ountres as part of the full sample of 25 developng ountres. The parameters for LAC are estmated as dfferenes from the parameters for the entre sample of developng ountres n equatons (2) and (3). Thus, equaton (2) beomes: lntfp t = 0 ( β N + α N DLAC) ln NRDt + β E Et β GG β + + 4

8 + β t Dt + β D + β D + ε t ; (4) t We also estmate equaton (4) wth DLAC replang β D. And equaton (3) beomes: lntfp t = 0 [ β N + α N DLAC + ( γ N δ N DLAC) DR] ln NRDt β β E Et + β GG + β t Dt + β D + β D + ε t ; (5) t We also estmate equaton (5) wth DR replang β D and DLAC replang β D. Fnally, we also examne the nteraton between eduaton (or governane) and NRD to see f eduaton (or governane) affets TFP not just dretly but also by affetng the mpat of NRD on TFP. 3. Defnton of Varables and Data Soures Our sample onssts of 16 manufaturng ndustres n the 9 LAC ountres beng examned as well as n the other developng ountres n our sample, over the perod The 9 LAC ountres are Bolva, Chle, Colomba, Euador and Venezuela n South Amera; Guatemala, Mexo and Panama n the rest of Latn Amera; and Trndad and Tobago n the Carbbean. 2 Argentna and Brazl were not nluded for lak of data. 3 2 The other 16 developng ountres are n East Asa (Hong Kong-Chna, Korea Rep.), South Asa (Bangladesh, Inda, Pakstan), South-East Asa (Indonesa, Malaysa, Phlppnes), Mddle East (Egypt Arab Rep., Iran Islam Rep., Jordan, Kuwat), Sub-Saharan Afra (Cameroon, Malaw), and Europe (Cyprus, Poland). 3 Easterly (2001, p. 186) argues that Brazl s restrtve trade poly hampered growth. He states If the government s foolsh enough to prohbt mports of mahnes, growth wll suffer. For example, Brazl moved more slowly nto the omputer revoluton than neessary beause of a government ban on PC mports, a msguded attempt to promote the domest PC ndustry, a lass attempt by vested nterests to hjak tehnologal progress. 5

9 The 16 ndustres onsst of 6 R&D-ntensve ndustres and 10 low R&Dntensty ndustres. 4 The R&D ntensty of the 16 ndustres s based on US data. An ndustry s R&D ntensty was alulated as R&D expendtures dvded by the value added of that ndustry. They are grouped n low (10 ndustres) and hgh (6 ndustres) R&D ntensty ndustres. 5 The TFP ndex s alulated as the dfferene between value added and fator nome, wth nputs weghted by ther nome shares,.e., lntfp = lny α ln L ( 1 α )ln K, wth α equal to the year-ountry-setor spef labor s share. Labor share equal to wages over value added. Value added, wages, and fxed aptal formaton are reported n urrent US dollars, and all are deflated usng US GDP deflators (1990=100). The aptal stoks are derved from the deflated fxed aptal formaton seres usng the perpetual nventory model wth a 5% depreaton rate. The R&D flow data are taken from the ANBERD 2000 (OECD) database (DSTI/EAS Dvson). The database overs 15 OECD ountres from 1973 to 1998 at ether the two-, three- or four-dgt level. 6 R&D flows over all ntramural busness enterprse expendtures, onverted nto US dollars, and then deflated usng US GDP 4 The 10 low R&D-ntensty ndustres are: (1) 31-Food, Beverage & Tobao; (2) 32-Textles, Apparel & Leather; (3) 33-Wood Produts & Furnture; (4) 34-Paper, Paper Produts & Prntng; (5) 355/6-Rubber & Plast Produts; (6) 36-Non-Metall Mneral Produts; (7) 371-Iron & Steel; (8) 372-Non-Ferrous Metals; (9) 381-Metal Produts; and (10) 39-Other Manufaturng. The R&D-ntensve ndustres are (1) 382-Non- Eletral Mahnery, Offe & Computng Mahnery; (2) 383-Eletral Mahnery and Communaton Equpment; (3) 384-Transportaton Equpment; (4) 385-Professonal Goods; (5) 351/2-Chemals, Drugs & Mednes; and (6) 353/4-Petroleum Refneres & Produts. 5 The R&D ntensty for the 16 ndustres wth ISIC odes 32, 33, 34, 31, 371, 381, 36, 355, 372, 39, 351, 353, 382, 385, 383, and 384 are 0.004, 0.006, 0.007, 0.008, 0.011, 0.013, 0.018, 0.022, 0.024, 0.028, 0.079, 0.081, 0.081, 0.110, and respetvely. The hgh R&D ntensty ndustres are n Itals. The average R&D-ntensty of the hgh luster s 11% whle that of the low luster s 1.3% (wth respetve standard devatons of 3.6% and.9%),.e., the hgh luster s more than 8 tmes more R&D ntensve than the low luster. Assumng a normal dstrbuton, the hypothess that any of the ndustres n the hgh R&D ntensty luster belongs to the low luster s rejeted at the 1% sgnfane level. 6 The 15 OECD ountres are: Australa, Canada, Denmark, Fnland, Frane, Germany, Ireland, Italy, Japan, Netherlands, Norway, Span, Sweden, Unted Kngdom, and Unted States. 6

10 deflators (1990=100). Cumulatve R&D stoks are derved from the deflated R&D flows usng the perpetual nventory method wth a 10% depreaton rate. The ountry spef, tme-nvarant nput-output matres for the twenty fve developng ountres are derved from GTAP (1998). For eah ountry-ndustry-year, the weghts (blateral openness shares mports/value added) are derved from the World Bank database Trade and Produton (Nta and Olarreaga, 2001). Trade data were olleted at the 4-dgt level and nput-output data at the 3-dgt level for the perod , and both were aggregated to 2- and 3-dgt levels for onssteny wth the R&D data (16 ndustres). The measure of eduaton used s the share of the populaton aged twenty fve and above that ompleted seondary eduaton. Ths s taken from Barro-Lee (2000) whh provdes fve-year averages for As for governane, we use an average of sx measures. 7 These were aggregated from a data base onsstng of hundreds of varables, and range from 2.5 to (Kaufmann, Kraay and Zodo-Lobaton, 1999a, 1999b). Values are for The range s smaller n our sample beause t exludes ndustral ountres and many LDCs. 4. Estmaton Results Estmatng the equatons for LAC as part of the full sample of 25 ountres provded better results than the estmaton for eah of the 9 LAC ountres separately or for the 7 The frst measure s voe and aountablty, a measure of the openness of the poltal proess, vl lbertes and poltal rghts; the seond one measures poltal nstablty and volene ; the thrd one measures government effetveness, and nludes the ndependene of the vl serve from poltal pressures and the redblty of governments poly ommtment; the fourth one s the regulatory burden, and nludes the ndene of pre ontrols and pereptons of burdens from exessve trade and busness regulatons; the ffth one s the rule of law, nludng enforeablty of ontrats, rme ndene, and effetveness of the judary; and the sxth s graft and measures pereptons of orrupton. 7

11 group of 9 LAC ountres. Ths makes sense sne gnorng the nformaton n the data from the non-lac ountres s lkely to bas the estmaton results. Table 1 presents estmaton results for LAC. Column () shows that the elastty of TFP wth respet to foregn R&D for low R&D-ntensty ndustres s postve, small and non-sgnfant. The elastty of foregn R&D for non-lac developng ountres s.245, whle that for LAC s.020 ( ). Column () shows that the elastty for R&D-ntensve ndustres n LAC (.120) s larger than for low R&D-ntensty ndustres (.007) and the same holds n the other developng ountres (DEV) where the elastty for R&D-ntensve ndustres s equal to.342 >.257. Column () shows that the elastty of TFP wth respet to eduaton s greater for LAC then for DEV, wth a value of 17.1 (= ) for LAC and 4.6 for DEV. Smlar results obtan for governane. The elastty of TFP wth respet to governane s 3.2 ( ) n LAC and.65 for non-lac ountres. Column () shows smlar results to those of olumn () for eduaton and governane. The above results ndate that the mpat of the North s R&D dffused through North-South trade on TFP s smaller n LAC whle the mpat of eduaton and governane s greater. Ths may ndate the possblty of nteraton effets, wth the eduaton and governane varables apturng some of the effets of foregn R&D. These potental nteraton effets are examned n Table Interaton wth Eduaton In olumn () n Table 2, eduaton s nterated wth trade-related foregn R&D (NRD) n R&D-ntensve ndustres (lnnrd*dr*e and lnnrd*dr*dlac*e). The nteraton 8

12 effet for non-lac ountres s negatve (-.062) but not sgnfant, whle the nteraton effet for LAC ountres s.216 ( ) and sgnfant at the 5% level. Thus, the nteraton effet between foregn R&D and eduaton s postve for R&D-ntensve ndustres n LAC but not n non-lac ountres. 8 What does ths mply for the effet of eduaton on TFP n LAC? A perentage pont nrease n eduaton rases TFP by 5.574% n R&D-sare ndustres. For R&Dntensve ndustres, we also have an nteraton effet of lntfp / E = lnNRD*DR*DLAC. The average value of the latter varable for the R&D-ntensve ndustres n LAC s 24 (somewhat hgher than n the rest of the sample). Thus, the nteraton effet equals 4.94 (.206*24) and the total effet s or lose to 90% hgher than that the effet for the low R&D-ntensty ndustres. In fat, the dfferene between the two effets may be even larger. The reason s that eduaton and TFP have mutually renforng effets n R&D-ntensve ndustres, mplyng a potental vrtuous growth yle n LAC. The mehansm s as follows. An nrease n eduaton rases TFP n all ndustres but t rases TFP n R&D-ntensve ndustres by lose to 90% more beause of the nteraton effet. The relatve nrease n the produtvty of R&D-ntensve ndustres rases the demand for sklled labor whh s used ntensvely n these ndustres and s omplementary wth tehnology. 9 Ths leads to further (possbly prvate) nvestments n eduaton, further nreases n the TFP of R&D- 8 We also tred nteraton effets between eduaton and foregn R&D for low R&D-ntensty ndustres but these turned out not to be sgnfant. Ths should not be surprsng. Eduaton reflets the apaty of the LAC ountry to absorb knowledge from the North and transform t nto hgher produtvty. And absorptve apaty s learly more mportant n R&D-ntensve ndustres than n low R&D-ntensty ndustres. 9 A strong postve mpat of nreases n tehnology on the demand for sklled workers s found by Abowd et al. (2007) for the US. 9

13 ntensve ndustres by 90% more than n low R&D-ntensty ndustres, further nrease n the demand for sklled labor, and so on. An nrease n openness rases the level of foregn R&D. In the ase of R&Dntensve ndustres n LAC, foregn R&D (lnnrd*dr*dlac) nterats postvely wth eduaton, wth an effet on TFP of.216. Ths mples that the postve mpat of eduaton on TFP n R&D-ntensve ndustres n LAC rses wth the degree of openness, and so does the mpat on TFP growth n the vrtuous growth yle. Thus, the quanttatve mportane of the vrtuous growth yle desrbed above rses wth openness. For nstane, f openness (say) doubles unformly aross all R&D-ntensve ndustres n all LAC ountres, the nteraton effet of eduaton on TFP doubles as well. So far, we have found that n the ase of LAC ountres, eduaton (sklls) and foregn knowledge (R&D) are mutually renforng n ther effet on TFP n R&Dntensve ndustres. Seond, from the onstruton of foregn R&D, the results for LAC mply that eduaton and openness are also mutually renforng n ther mpat on TFP n R&D-ntensve ndustres. Thrd, these results mply that eduaton an have a permanent effet on TFP growth n R&D-ntensve ndustres n LAC, even n the absene of a vrtuous growth yle. So far, we have abstrated from the growth of R&D stoks n the OECD. As R&D stoks n OECD ountres nrease over tme, foregn R&D n all ndustres, nludng n R&D-ntensve ndustres n LAC (NRD*DR*DLAC), rses as well. Assume that foregn R&D rses at a ontnuous rate of 10% per year beause of the nrease n OECD R&D stoks. Ths 10% nrease n NRD*DR*DLAC has an mpat on the growth of TFP equal to 10% of.216*e or.0216*e. Thus, the growth rate of TFP n R&D-ntensve ndustres 10

14 n LAC rses wth eduaton. In other words, growth of knowledge n the North translates n hgher growth rates n the LAC s R&D-ntensve ndustres when the absorptve apaty (.e., eduaton level) n LAC s hgher. How large s the nteraton effet for the ndvdual LAC ountres? The nteraton effet s equal to.216*lnnrd*dr*dlac*e, and the total effet of eduaton on TFP s equal to 5.574E for low R&D-ntensty ndustres, and s (5.574E +.216*lnNRD*DR*DLAC*E) for R&D-ntensve ndustres. Ths effet vares by ountry aordng to the varaton n foregn knowledge (NRD) and eduaton (E). The average level of lnnrd (averaged over tme and R&D-ntensve ndustres) vares lttle aross ountres but eduaton does vary muh aross LAC ountres. The seondary shool ompleton rato for 1998 vares from a low of 2.53% n Guatemala, 4.33% n Venezuela, 6.20% n Bolva, 7.97% n Euador and 8.43% n Colomba, to hghs of 12.33% n Trndad and Tobago, 12.93% n Mexo, 15.0% n Chle and 16.2% n Panama. Wth the values of eduaton and lnnrd, we an derve the ountry-spef effet of eduaton for low R&D-ntensty ndustres and for R&D-ntensve ndustres. These are shown n Table 3. As an be seen, the total effet of eduaton on TFP vares from a low of 27.3% n Guatemala and 45.7% n Venezuela for R&D-ntensve ndustres to a hgh of 162% for Chle and 179.9% for Panama. Gven that NRD vares lttle aross ountres whle eduaton vares a lot, the ross-ountry dfferenes are essentally determned by the dfferene n the level of eduaton. Moreover, for a gven rate of growth of NRD, the mpat of a 1 perentage pont nrease n eduaton on the growth rate of TFP for R&D-ntensve ndustres s about the same n all LAC ountres. However, a 1 perentage pont nrease n the level of 11

15 eduaton mples a muh larger proportonal nrease for some ountres than for others. For nstane, a 1 perentage pont nrease n eduaton amounts to a 39.5% nrease for Guatemala (whose eduaton level s 2.53%), whle t amounts to a 6.2% nrease n Panama (where the level s 16.2%). Assumng that all LAC ountres rase the level of eduaton by 1% rather than 1 perentage pont, the effets on the growth rate of TFP assumng that NRD n R&D-ntensve ndustres grows at 10% per year s.05% for Guatemala,.09% n Venezuela,.13% n Bolva,.16% n Euador,.17% n Colomba,.25% n Trndad and Tobago,.27% n Mexo,.31% n Chle and.33% n Panama. These effets may appear small, but they are not beause they are permanent produtvty growth effets and beause eduaton an be rased by more than 1% over tme Interaton wth Governane We now turn to olumn (v) n Table 2. Ths olumn s smlar to olumn () exept that nteraton effets are wth respet to governane rather than wth eduaton. Governane has a dret postve and statstally sgnfant effet on TFP. It also nterats postvely and sgnfantly wth foregn knowledge n LAC s R&D-ntensve ndustres, wth a oeffent equal to.023 ( ). The effet of governane on TFP n R&D-ntensve ndustres n LAC s lntfp / G = lnNRD*DR*DLAC. Wth an average value for lnnrd n R&D-ntensve n LAC equal to 24 and lttle varaton aross ountres, the effet s equal to *DR*DLAC. The range from the lowest value (Guatemala) to the hghest value (Chle) of the governane ndex s (see below). Assume that a ountry were to rase ts governane ndex by.1 (about 7% of the range between the lowest and hghest 12

16 value). The mpat would then be an 8% (.0788) nrease n TFP for low R&D-ntensty ndustres and a 13% (.1340) nrease n TFP for R&D-ntensve ndustres. The ndex of qualty of governane n LAC ranges from n Guatemala, n Colomba, n Venezuela, n Euador, n Mexo, to.018 n Bolva,.115 n Panama,.589 n Trndad and Tobago, and.874 n Chle. If Guatemala were to rase the qualty of ts governane to that of Chle (.e., by 1.378), ts TFP would rse by 1.09 (=.788*1.378) or by 109% n low R&D-ntensty ndustres, and by 1.85 (= ( )*1.378) or by 185% n R&D-ntensve ndustres. Note that there s a vrtuous growth yle here as well. An nrease n.e., an mprovement n the qualty of--governane rases TFP n all ndustres, though more so n R&D-ntensve ndustres. The hgher produtvty rases the value of good governane (nludng the rule of law (enforeablty of ontrats, respet for property rghts, rme ndene, effetveness of the judary), poltal stablty, redblty of poly ommtments, and ndene of orrupton). The greater beneft of good governane rases the demand for, and equlbrum level of, governane. Ths has a further postve mpat on TFP, whh results n a further nrease n the demand for governane, and so forth. Note also that ths vrtuous growth yle s stronger for R&D-ntensve ndustres. Turnng now to the ombnaton of the effets of eduaton and governane, olumn (v) shows the nteraton effet of eduaton, governane and foregn R&D for R&D-ntensve ndustres n LAC. One agan, the results on eduaton and governane presented above arry through, and the nteraton effet s equal to.241. Thus, these regresson results lead to the addtonal mplaton that both nreases n eduaton and nreases n governane have permanent effets on the growth of TFP and that these 13

17 effets are mutually renforng. Moreover, the vrtuous growth yles themselves are mutually renforng. Another mplaton s that, at least as far as R&D-ntensve ndustres n LAC are onerned, ountres would beneft more from oordnated mprovements n eduaton, governane and trade poly, than by fousng on eah poly ndvdually. 5. Conluson Ths paper has foused on tehnology dffuson and ts mpat on produtvty growth n Latn Amera and the Carbbean (LAC) and examned, nter ala, the mpat of eduaton and governane on TFP. The analyss s onduted at the ndustry level. We fnd that North-South trade-related tehnology dffuson (NRD) has a large postve mpat on TFP n non-lac ountres, and has no sgnfant mpat n R&Dsare ndustres n LAC ountres and a sgnfant mpat n R&D-ntensve ndustres, though smaller than n non-lac ountres. We also fnd that eduaton and governane have a postve mpat on TFP whh s several tmes larger n LAC than n non-lac ountres. The results for LAC suggest that nteraton effets may exst. Moreover, both eduaton and governane nterat postvely wth NRD n ther mpat on TFP n R&D-ntensve ndustres n LAC but not n non-lac ountres. Ths mples that an nrease n eduaton and/or governane has a permanent effet on TFP growth n LAC s R&D-ntensve ndustres, and that ths effet s larger the more open s the eonomy. It also mples a vrtuous growth yle wth respet to eduaton n Latn Amera, as nreases n eduaton result n a substantally larger nrease n produtvty n R&D-ntensve than n R&D-sare ndustres, leadng to an nrease n the demand 14

18 for sklls, further nreases n eduaton, further produtvty nreases whh are larger n R&D-ntensve ndustres, further nreases n the demand for sklls, and so on. Gven the postve mpat on TFP of the nteraton between NRD and eduaton and between NRD and governane n R&D-ntensve ndustres n LAC, t follows that trade lberalzaton, whh rases NRD, results n an nrease n the TFP mpat of eduaton and governane n these ndustres. Ths rases the nentve to nrease both the level of eduaton and the qualty of governane, thereby rasng the mpat of NRD on TFP. Hene, the nentve to open the eonomy further nreases, whh rases the return to eduaton and governane n R&D-ntensve ndustres. Ths provdes an nentve to nrease the level of eduaton and governane, whh agan rases the return to openness n these ndustres, wth nreased openness further rasng the return to eduaton and governane n R&D-ntensve ndustres, et. Thus, the vrtuous yle assoated wth an nrease n eduaton s renfored by another vrtuous yle assoated wth an nrease n openness, and the same holds for an ntal nrease n governane. In other words, an nrease n any of the three varables openness, eduaton and governane an lead to a vrtuous growth yle, though the strength of the growth yle s greater n the ase of an nrease n two of the three varables and s strongest n the ase of an nrease n all three varables smultaneously. From the poly perspetve, the results suggest that authortes would have a greater nentve to nvest n eduaton, mprove governane and open the eonomy than n the absene of the postve and mutually renforng nteraton effets between these varables, and that the nreased nentve would be hghest wth respet to a oordnated mprovement n eduaton, governane and trade poly. 15

19 Referenes Abowd, John M., John Haltwanger, Jula Lane, Kevn MKnney and Krstn Sandusky "Tehnology and the Demand for Skll: An Analyss of Wthn and Between Frm Dfferenes." IZA Dsusson Paper No Coe, Davd T., and Elhanan Helpman Internatonal R&D Spllovers. European Eonom Revew 39 (5): , and Alexander W. Hoffmaster North-South R&D Spllovers, Eonom Journal 107, Grossman, M. Gene, and Elhanan Helpman Innovaton and Growth n the Global Eonomy. The MIT Press, Cambrdge, MA: London. GTAP Global Trade, Assstane, and Proteton: The GTAP 4 Data Base. Center for Global Trade Analyss. Purdue Unversty. Kaufmann, Danel, A. Kraay and P. Zodo-Lobaton. 1999a. Aggregatng Governane Indators. Poly Researh Workng Paper No World Bank. Washngton, DC. and. 1999b. Governane Matters. Poly Researh Workng Paper No World Bank. Washngton, DC. Lumenga-Neso, Marelo Olarreaga and Maure Shff On Indret Trade-Related Researh and Development Spllovers. European Eonom Revew 49 (7): Nta, Alessandro and Marelo Olarreaga Trade and Produton, Poly Researh Workng Paper No World Bank. Washngton, D.C. (November). Shff, Maure and Yanlng Wang North-South and South-South Trade-Related Tehnology Dffuson: An Industry-Level Analyss. Canadan Journal of Eonoms 39 (3). 16

20 Table 1. The Impat of Eduaton and Governane on log TFP n LAC Varables () () lnnrd (7.39)*** (6.50)*** lnnrd*dlac (-4.46)*** (-6.03)*** lnnrd*dr (2.05)** lnnrd*dr*dlac (3.8)*** E (2.83)*** (2.45)** E*DLAC (3.48)*** (3.81)*** G (3.22)*** (3.25)*** G*DLAC (1.90)* (3.54)*** Adjusted R Observatons Note: Fgures n parentheses are t-statsts. Sgnfane levels of 1%, 5% and 10% are ndated by ***, ** and * respetvely. Regresson results on ountry, year and ndustry dummes, and the onstant, are not reported. NRD s the trade-related North-foregn R&D. DR = 1 for R&D-ntensve ndustres and DR= 0 for low R&D-ntensty ndustres. DLAC=1 for Latn Ameran and Carbbean ountres and DLAC=0 for non-lac ountres. E s the seondary shool ompleton rato for the populaton aged 25+. G s the average of the sx governane ndators desrbed n Seton 3. 17

21 Table 2. Determnants of log TFP n Latn Amera, wth Interaton Effets Varables () (v) (v) lnnrd (6.05)*** (6.29)*** (3.11)*** lnnrd*dlac (-5.22)*** (-5.03)*** (-4.42)*** lnnrd*dr (2.38)** (2.26)** (1.23) lnnrd*dr*dlac (-0.04) (2.96)*** (2.38)** E (3.64)*** (3.58)*** (1.57) lnnrd*dr*e (-1.46) lnnrd*dr*dlac*e (2.08)** G (2.51)** (2.95)*** (0.12) lnnrd*dr*g (-2.64)*** lnnrd*dr*dlac*g (2.78)*** E*G (3.58)*** lnnrd*dr*e*g (-1.29) lnnrd*dr*dlac*e*g (2.82)*** Adjusted R Observatons Note: Fgures n parentheses are t-statsts. Sgnfane levels of 1%, 5% and 10% are ndated by ***, ** and * respetvely. Regresson results on ountry, year and ndustry dummes, and the onstant, are not reported. NRD s the trade-related North-foregn R&D. DR = 1 for R&Dntensve ndustres and DR= 0 for low R&D-ntensty ndustres. DLAC=1 for Latn Amera ountres and DLAC=0 for non-latn Amera ountres. E s the seondary shool ompleton rato for the populaton aged 25+. G s the average of sx governane ndators desrbed n Seton 3. 18

22 Table 3: Effet of eduaton on TFP n R&D-ntensve ndustres (n %)* (1) (2) (3)=(1)+(2) Low R&Dntensty ndustres Interaton effet wth DR R&D-ntensve ndustres Bolva Chle Colomba Euador Guatemala Méxo Panama Trndad & Tobago Venezuela Average * The effet on TFP s from a 1 perent nrease n the level of eduaton