New results and a model of scale effects on growth

Abstract

The consensus view in the growth literature is that R&D scale effects are absent in mature industrialized economies but may be present in emerging economies undergoing transition. Scale effects imply a proportional relationship between a stationary $I(0)$ regressand (growth rates of real per capita GDP and/or TFP) and a non-stationary $I(1)$ regressor (the scale of R&D), which gives rise to the problem of unbalanced regression and spurious parameter estimates. This issue has not been adequately addressed in the existing literature. Furthermore, emerging economies have received relatively little attention in this context. We address these issues by (i) accurately measuring R&D scale and (ii) adopting an appropriate econometric specification and estimator. We find significant scale effects in a panel of emerging countries, but not in developed countries. We propose an endogenous growth model that captures these properties—presence of scale effects during growth transitions, but not at the long-run equilibrium—thereby reconciling our results. Our model predicts that the long-run growth rates of per capita real GDP and TFP are driven by the growth rates of technological innovation and aggregate employment—although, in the case of emerging economies, only technological innovation significantly contributes to TFP growth.