Technology and the global economy.

• Author: Eaton, Jonathan

Since at least the eighteenth century, much of the world has experienced ongoing gains in the standard of living, a process that Simon Kuznets labeled "Modern Economic Growth." Economists have long sought to understand the forces behind this phenomenon. Accumulation of physical capital provided a simple and natural explanation. But Robert Solow's fundamental work in the late 1950s showed that capital accumulation could account for less than half of the growth in U.S. income per capita. Solow suggested that ongoing improvements in technology might tell the rest of the story. While subsequent work refined Solow's analysis, it did little to upset the basic conclusion that capital accumulation provides a very incomplete explanation for why countries grow.

While interest in growth waned in the 1970s, the last decade and a half has seen a resurgence of research on why incomes rise over time, and why some countries are richer than others. There are now a number of elegant theories of how technological progress drives growth. But in turning the spotlight to technology rather than to investment, Solow made the job of quantifying the sources of growth, and assessing how policies affect growth, much harder.

At the heart of the problem is measurement. We have imperfect, but usable, ways to measure resources diverted from other uses toward investment in capital. We can also gauge (much more roughly) how much capital is on hand. Such measures give us some handle on capital's contribution to growth over time and to differences in incomes across countries. But technology presents the empirical economist with a much more elusive concept. We do not observe people coming up with new ideas, and we cannot systematically trace how these ideas shape the process of production over time and space.

A number of basic questions, however, hinge on understanding how innovations occur, and how these innovations raise income levels around the world. For example: Do countries rely, for the most part, on their own innovations, or are the gains from innovation largely shared? Where does most innovation occur, and where are these innovations most rapidly put into practice? To the extent that the benefits of innovation seep across borders, do these gains spread through the exchange of products embodying these innovations, or through the diffusion of the ideas themselves?

The answers to these questions are of intrinsic interest, but they are also at the heart of any evaluation of the myriad government policies that affect innovation. For instance: What are the benefits and costs of tougher patent protection, and how are they shared across countries? Does a country recover the costs of giving research expenditures favorable tax treatment, or are the benefits largely dissipated through the diffusion of innovations abroad? What are the gains from coordinating research policies internationally? To what extent does greater openness spread the benefits of technical progress?

Sam Kortum and I are engaged in a research project that attempts to shed light on these issues. Our framework builds on recent advances in growth theory and trade theory. We take this theoretical framework to a number of sources of data. We look not only at productivity across countries and over time; we also use data on research effort, patenting, education, and bilateral trade.

Our research so far has pursued four broad sets of issues: 1) quantifying the contributions of innovation and diffusion to world growth, 2) explaining differences in research effort across countries, 3) analyzing the effects of national technology policies in an international context, and 4) assessing the role of trade in disseminating the...