Testing Schumpeterian growth theory: the role of income inequality as a determinant of research and development expenditures (developed economies) and successful technology transfers (developing economies)

This paper tests a strand of Schumpeterian growth theory that predicts a role for income inequality as a determinant of technology-enhancing activities, in the shape of innovation in the North and of technology transfers in the South. The analysis is conducted at three different levels: by world region, by industrial sector and by country. While the analysis by world region does not produce any clear cut evidence, the analysis by sector yields some evidence that income inequality in the South may have a positive effect on research and development (RnD) expenditures in some industrial sectors located in the North, such as non electricals and pharmaceuticals. Income inequality in both world regions seems also to play a role on the amount of technology that is transferred to the developing world. The sign of the effect might be positive for some sectors and negative for others, but the overall impact is probably negative in the case of Northern income inequality and positive with respect to Southern income inequality. However, the strongest evidence came from the cross-country analysis. We found that for each of the 15 OECD countries, foreign income inequality in the countries that trade the most with them, had a positive effect on the research and development expenditure carried out in those 15 countries. Such evidence appeared robust to whether we introduced control variables or not, and to several ways of measuring the dependent variable and the independent variables concerned. The cross-country analysis also yielded some evidence of a positive effect of both domestic and foreign (mainly developed world) income inequality on the level of technology transfers to developing countries.