Endogenous Convergence and International Technological Diffusion Channels

Abstract The goal of the paper is to estimate relative importance of channels of technological diffusion between new member states and core EU countries. Based on neoclassical growth theory and extensive literature survey on technological diffusion we explore movements in the relative TFP in EU member states and try to identify relative importance of channels of technological diffusion as suggested by theory: imports, exports, FDI, R&D, human capital and fixed capital formation, etc. In the first step we employ Phillips and Sul (2007) log t test which has power to detect convergence even in the absence of cointegration between time series. In the second part we employ Abrigo and Love (2016) PVAR model in order to detect channels of diffusion of technology. The data is sampled from Eurostat and PWT repository and covers the period from 1995-2016 for panel analysis and 1950-2014 for TFP convergence analysis. Our results indicate that in the overall sample FDI and R&D are major drivers of technological change, while, contrary to conventional wisdom, trade openness and human capital are dominant channels for TFP diffusion in periphery countries. The overall results point that productivity gap reduction is a heterogeneous process, country specific problem, but on average in the periphery it can be supported through various economic policies focused on openness and human capital.