Research Discussion Papers, Bank of Finland
Why is Europe lagging behind?
Abstract: This paper builds on the literature on growth in searching
for explanations for the divergent growth performance between the EU
countries and the United States. We emphasise the role of R&D investment
and perhaps different degrees of elasticity of substitution between capital
and labour. We estimate two different production functions, namely
Cobb-Douglas and CES specifications, with physical capital, a measure of
labour, and residual ‘technical trend’ as inputs.
Our first finding is
that in many ICT-producing and using countries such as Denmark, Finland,
Ireland, Sweden and the United States technical progress has been
accelerating during the past decade. Secondly, this speeding up of
technical progress has been associated with R&D investment and perhaps with
increasing elasticity of substitution between capital and labour. Hence,
our results suggest that there is no growth paradox in Europe: the R&D
factor and the elasticity of substitution between capital and labour which
have been known to be important factors of economies’ growth potential,
actually explain a significant part of the divergent growth performance of
the European economies as well.
Keywords: endogenous growth; panel data estimation; production function; R&D; technical progress; elasticity of substitution; (follow links to similar papers)
JEL-Codes: E22; E23; O51; O52; (follow links to similar papers)
45 pages, February 28, 2007
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