BUSINESS ENVIRONMENT Part 2

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BUSINESS ENVIRONMENTPart 2

• Lecturer Tjaa REDEK
• (tjasa.redek_at_ef.uni-lj.si)

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Framework for growth analysis
Source Snowdon, 2006
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Objective for today

• The primary goal of this lecture is to examine
  the growth processes in developed in developing
  economies (primarily these). To do that, we will
  systematically examine
• Theory of growth
• What are the the differences among developed and
  developing regarding the main growth factors
  (specially technological development and human
  capital)
• What is convergence, what are its main factors
  and is it taking place? The case of EU

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Historical growth rates
Source Snowdon, 2006
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Historical growth rates extensive vs. intensive
growth

• Intensive growth
• GDP growth exceeds the growth of population, the
  GDP per capita grows
• 2 sources of intensive growth
• Productivity gains
• Technological progress

Extensive growth the increase in GDP is fully
absorbed by the increasing population, the GDP
per capita remains basically unchanged

• Lawrence H. Officer and Samuel H. Williamson,
  "What Was the Chinese GDP or CPI Then?"
  MeasuringWorth, 2008. URL http//www.measuringwor
  th.org

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Historical growth rates extensive vs. intensive
growth and the role of industrial revolution
Historical growth data of per capita GDP,
1000-2001,
Source of data Maddison (2004),
http//www.ggdc.net/Maddison/
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Historical growth performance

• USA
• http//www.measuringworth.org/graphs/graph.php?yea
  r_from1790year_to2008tableUSfieldREALGDPlo
  g
• UK
• http//www.measuringworth.org/graphs/graph.php?yea
  r_from1830year_to2008tableUKfieldGDPKPlog
  
• Japan
• http//www.measuringworth.org/graphs/graph.php?yea
  r_from1952year_to2007tableJAPANfieldREALGDP
  log

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SOLVING THE GROWTH PUZZLE THE THEORETICAL
PERSPECTIVE
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Four waves of growth theory

• The neo-keynesian Harrod-Domar model
• The Solow-Swan neoclassical model
• The Romer-Lucas inspired endogenous growth models
• Modern political economy models

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1. The SOLOW MODEL
R. Solow

• An exogenous growth model
• an increase in capital per unit of augmented
  labour leads to higher output per unit of
  augmented labour

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• Derivation
• Assumptions
• 1. Inada conditions (ass. about the production
  function)
• 2. Growth rates of labour and technological
  progress
• rL n
• rA g

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• Production function
• F(K,AL) Ka (AL)1-a , 0ltalt1
• Intensive form
• f(k) F(K/AL,1)
• (K/AL)a
• ka

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• Analysis
• Product per unit of augmented labour depends on
  the capital per unit of augmented labour.
• Thus, to ensure growth of product per unit of
  augmented labour (economic growth), capital per
  unit of augmented labour has to be increased.
• dk/dtsy dk nk gk
• d depreciation rate

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• THE STEADY STATE

y
yf(k)
sy
(ndg)k
k
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• IN THE STEADY STATE
• y and k are constant
• Growth of Y/L and K/L determined by the exogenous
  technological change (g). If there is no
  technological progress, there is no growth in the
  long run.
• Growth of Y and K is equal to the sum of
  population growth rate and technological
  progress.

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Is the model consistent with data?

• Kaldors stylized facts on growth
• Per capita product grows over time and its growth
  rate does not tend to diminish
• Physical capital per worker grows over time
• K/Y is relatively constant
• The profit rate is relatively constant
• The shares of labour and physical capital in
  national income are relatively constant.
• There are differences in the growth rates of
  output per worker among economies
• Solow
• Per capita product increases in time (g)
• K/Y constant

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Econometric testing?

• Does growth truly depend only on capital, labour
  and technology?
• ryrAwKrKwLrL
• 
  (0,3) (0,7)
• The regression results for the USA, 1950-85,
  show
• ryabrKcrLe
• rY3,2
• rKrY (0,30,032)
• rL1,5 (1,50,7)
• 3,2 Solow residual 0,33,2
  1,50,7
• Solowov rezidual (1,19) is an approximate measure
  of technological progress.

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The problem of the Solow model

• Key problem of the Solow Swan model
• Technological progress is exogenous and is not
  explained within the model
• But it is very important to understand why there
  is technological progress and why companies are
  motivated to invest in RD
• This problem is dealt with within the endogenous
  growth theory. Numeorous models have been
  developed. The beginning of the theory dates in
  1986 and 1988 with Romers (1986) and Lucas
  (1988) models.

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How does endogenous growth contribute to
explaining growth?

• From the start, technological progress is the key
  element. But how does it appear, why firms invest
  in RD and what these investments depend on?
• Learing by doing (Romer, 1986) new knowledge
  depends on the capital investment (AiKi)
• Knowledge spillover (AK)
• The role of human capital (Uzawa-Lucas model)
• Technological change with an expanding product
  variety
• Quality ladder model
• And many other models

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How does endogenous growth contribute to
explaining growth?

• Differences between the developed and developing
  countries
• For the developing, the catching up process is
  taking place (i.e. the developing are growing
  faster than the developed and are consequently
  narrowing the gap)
• The importance of technology transfer and foreign
  investment
• The advantages of backwardness and leapfrogging

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Convergence?

• Absolute convergence if all economies were the
  same in terms of factors (savings rate,
  preferences, access to technology, population
  growth), then the neoclassical model predicts
  that poor countries should grow faster as rich
  (due to diminishing returns).
• Conditional convergence the world is not
  homogenous, countries differ in many aspects. The
  growth rates of poorer countries might be high or
  low relative to their long-run steady-state
  position, which is determined by the savings rate
  and other key variables.
• (Snowdon, 2006, p. 84)

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Convergence?

• Beta convergence poor countries tend to grow
  faster than rich ones
• Sigma convergence the cross-sectional standard
  deviation of real GDP per head for a group of
  economies is falling over time.
• Beta-convergence is a necessary condition for
  sigma convergence.

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Convergence basic evidence

• There is evidence of conditional Beta-
  convergence within homogeneous regions. The speed
  of convergence has been estimated to be quite low
  (the gap narrows down at a rate of 2-3 per year,
  the so-called Iron law of convergence)
• There is also evidence of absolute or
  unconditional Beta-divergence at the world level
  at different horizons (1830-present
  1950-present).
• Therefore, there is no evidence of
  Sigma-convergence at the world level.
• Source Guerrero, N.A., Teaching Convergence
  what should undergrads know? www.highered.mcgraw-h
  ill.com/sites/dl/free/.../102238/Guerrero.ppt

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Convergence basic evidence

• Globally, there is no indication of beta
  convergence. For beta covergence poorer countries
  should grow faster.

Source Acemoglu Introduction to Modern Economic
Growth, 2008
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Convergence basic evidence

• However, there is beta convergence among the
  richer economies (OECD example).

Source Acemoglu Introduction to Modern Economic
Growth, 2008
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Convergence basic evidence

• Convergence and lack of convergence

Source Acemoglu Introduction to Modern Economic
Growth, 2008
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Convergence basic evidence

• Sigma convergence? Does the income variation
  decrease in time?

Source Acemoglu Introduction to Modern Economic
Growth, 2008
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Convergence basic evidence
Source Acemoglu Introduction to Modern Economic
Growth, 2008
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Convergence basic evidence
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PRESENTATION

• Convergence in the EU are new members catching
  up with the old?

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OTHER DETERIMINANTS OF GROWTH

• TRADITIONAL DETERMINANTS
• TECHNOLOGICAL DEVELOPMENT AND HUMAN CAPITAL
• MACREOCONOMIC BUSINESS ENVIRONMENT
• INSTITUTIONAL ENVIRONMENT AND COMPETITIVENESS
• FDI
• GLOBALIZATION AND TRADE
• THE SPIRIT OF ENTREPRENEURSHIP
• POLITICS AND GROWTH
• SOCIAL SECURITY A BURDEN?

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Framework for growth analysis
Source Snowdon, 2006
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TECHNOLOGICAL DEVELOPMENT AND INNOVATION

• Technological development and human capital are
  today often mentioned as the two most important
  factors of economic growth, especially in
  developed economies.
• Education
• Human capital formation (also training, life-long
  learning)
• Technological development and innovation
• But, technological transfer is very important
  also for the faster development of developing
  economies. The importance of FDI is big.

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What is innovation?

• Innovation is the act of introducing something
  new or different.
• Innovation is the doing of new things or the
  doing of things that are already being done in a
  new way Innovation is a process by which new
  products and techniques are introduced into the
  economic system.(Schumpeter 1947)
• the first commercialization of an idea
  (Fagerberg 2004)
• An innovation is the implementation of a new or
  significantly improved product, or process, a new
  marketing method, or a new organisational method
  in business practice, workplance organisation or
  external relations (OECD)
• Innovation is an invention that has been
  successfully implementated and introduced in the
  market

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What is innovation?

• It refers to
• Making something new
• Making existing things do something new
• Doing things in a new way
• i.e.
• Product and
• Process innovation

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What is diffusion?

• Everett Rogers Diffusion of Innovations (1962)
  An innovation is an idea perceived as new by the
  individual.
• Diffusion is the process by which an innovation
  spreads
• Adoption is the decision to continue full use of
  an innovation.
• DIFFUSION
• The spread of a new product or process throughout
  society or markets
• Important process that enables an innovation to
  contribute to economic growth and welfare
• Focus on adoption of innovations
• Macro perspective

Source Rametsteiner, 2007
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What is diffusion?
Source Rametsteiner, 2007
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Innovation and growth

• Economist Intelligence Unit (2007)
• Numerous studies confirm relationship between
  growth and innovation, although measuring
  problems exist (RD spending used as proxy, )
• Studies across firms and sectors in developed
  countries show
• positive relationship between RD and labour
  productivity or TFP growth the impact of a 1
  increase in the stock of RD on output estimated
  to be in the range of 0.05 to 1 of output.
• the returns to process RD tend to be higher than
  the returns to product RD
• basic RD typically yields more than applied RD
  
• RD returns vary considerably between industries,
  with the highest returns in research-intensive
  industries.
• Most studies use productivity as the measure of
  firms. economic performance, with relatively few
  focusing on profits.
• When studying, refer to
• http//www.nuff.ox.ac.uk/users/cameron/papers/empi
  ric.pdf

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What drives innovation?

• Sources of new technological knowledge
  (education, chambers, analyses, )
• The capacity to absorb and exploit knowledge
  (ability of the firm to turn knowledge into new
  products, processes or services, importance of
  the people who innovate, create knowledge and
  manage business)
• Access to finance
• Competition (an additional stimulus)
• Customers and suppliers put pressure on companies
  (also the importance of global markets)
• Regulatory environment
• Networks and collaboration

Source Competing in a global economy, 2003
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Government influence?
Source Competing in a global economy, 2003
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Case analyses

• Lets first provide some data on differences in
  technological development and then present some
  cases
• Internet use and economic growth
• Mobile phones and progress in Indian fishing
  sector
• ICT in transition economies
• ProcterGamble in transition economies

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Innovation and technological development in the EU
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Innovation and technological development in the EU

• TASK
• Analyze the handout with data on innovation
  activity and GDP.
• Which countries are most, which least developed?
• What are their characteristics in terms of human
  development and technological development?

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TASK (to do at home)

• Analyze the handout with data on innovation
  activity and GDP.
• Provide an overview of innovation activity in
  your country and assess the overall business
  environment (including the activities of the
  government)!
• Approximately 3 pages
• Due 16th November