Interrelationship among institutional infrastructure, technological innovation and growth. An empirical evidence

Abstract

This paper uses a multi-equation model to achieve an overall study of two key factors which explain growth, technology and institutions. The paper focuses on the process of the accumulation of these factors and the interrelationship arising among them. A theoretical model is given, together with empirical evidence for the joint impact of these factors on economic growth in a wide-ranging sample of countries between 1985 and 1997. This paper also contributes certain novel aspects in the variables employed. Thus, an indicator of human capital and an index reflecting institutional infrastructure have been used. The human capital indicator considers health, formal education, informal education and accumulated experience. It embraces a wider range of factors than the variables conventionally used in empirical studies. As to the institutional infrastructure index, it has been constructed on the basis of six institutional sub-indices, comprising voice and accountability, political stability, government effectiveness, regulatory quality, rule of law and control of corruption. Thus, the index constructed captures a greater wealth of the items commonly covered by the concept of institutions.

Acknowledgements

This study has been financed by the Government of Aragon and the University of Zaragoza, project 269–58 and 269–67.

Notes

¹ The reader is referred to the books of Solow (2000) and Sala-i-Martín (2000), which discuss some of the main theoretical models. A more technical and exhaustive analysis is to be found in chapters 1 to 3 of Romer (2001), in Aghion and Howitt (1998) and in Barro and Sala-i-Martín (2003). The work of Durlauf and Quah (1999) and McGrattan and Schmitz (1999) provide a review of the results obtained from a range of empirical studies.

² These and other related ideas are discussed in the introduction to Nelson (1996).

³ The paper by DeLong and Summers (1991) provides not only a theoretical argument but also empirical evidence for the link between various components of investment and economic growth in the period between 1960 and 1985 drawn from United Nations data and the Penn World Tables. Thus each additional percentage point of investment during the period considered resulted, on average, in 0.33% increase in growth. Temple (1998) examines the correlation between investment in capital equipment and growth, and the implications of this relationship for the Solow model, finding that the returns on capital investment are very high in developing countries.

⁴ One of the aims of these models is to include technological innovation as an endogenous factor. This is achieved by assuming that investment in research and development generates a return for enterprises insofar as they are able to appropriate at least a part of the benefits arising from their discoveries. This takes account of the fact that the technology market is not perfectly competitive, allowing firms to recover the high costs incurred in the development of technologies, as explained in Romer (1991). These contributions are joined by the inclusion of other concepts in the models, such as creative destruction (Aghion and Howitt, 1992, 1998), and the presence of externalities and economies of scale arising out of the innovation process.

⁵ McMahon (1999) describes an international study in which these outcomes were examined by comparing the development of and respect for human rights, crime indices and the quality of the environment in light of the levels of education attained in the countries considered. Gemmell (1996) and Appleton et al . (1996) examine the consequences of gains in the levels of educational attainment in developing countries, noting advances in social cohesion and various positive institutional effects. Finally, in Alesina and Perotti (1996) socio-political stability is captured using a range of indices and explained, among other factors, in terms of the accumulation of human capital.

⁶ Our empirical analysis focuses on two aspects: the equality of income distribution and available per capita income.

⁷ The growing interest among economists and politicians in institutional issues and their interrelationships with growth has been reflected in a proliferation of indices that seek to measure institutional aspects in the greatest possible number of countries with the aim of creating standardized and comparable indicators. The method applied by Kaufmann, Kraay and Zoido-Lobatón has the advantage of aggregating a large volume of data, bringing together and systematizing both individual sources and aggregate indicators. Furthermore, the indices have been constructed for a large number of countries (160), facilitating their inclusion in international studies.

⁸ Temple (1999: 148) argues in favour of the principal components method to construct institutional indices of this kind, asserting that ‘… simple techniques for data reduction like factor analysis and principal components have been largely ignored by recent growth researches. Their use seems to have a great deal of potential, and the renewed interest in social factors aligns well with recent theoretical work, reinforcing the case for further study’. Temple and Jonson (1998) use the method to create a social development indicator.

⁹ Barro and Sala-i-Martín (2003) also point out that initial per capita income could provide an approximation of the stock of capital, a variable that is not quantified in many of the sample countries.

¹⁰ At most, and given that ideas spread worldwide become more relevant, the articles published in scientific and technical journals, together with the human capital indicator, are helpful in the approximation of the adoption and the accumulation of new technologies by the different countries.