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Productivity growth and product variety : gains from imitation and education

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  • Addison, Douglas M.
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    Abstract

    Is there a correlation between productivity and product variety? Certainly it appears that the rich countries are more productive and have more product variety than the poor nations. In fact, the relationship is quite strong when measured in levels. Does this same correlation hold up when measured in growth rates? If so, can poor countries imitate the success of the rich? Addison provides theoretical and empirical reasons to believe the answer to both questions is yes. Recent economic theory suggests that rising variety in factor inputs can help avoid diminishing marginal returns. Product variety can also sustain learning-by-doing which would otherwise be exhausted in a fixed number of products. Finally, invention or imitation adds to the stock of non-rival knowledge. There have been only two previous empirical tests of the correlation between growth in product variety and productivity growth. Both were affirmative but neither examined a wide range of developing countries and neither looked deeper to test what might drive product variety. This research is based on a cross-country sample of 29 countries (13 rich and 16 poor). The data display a statistically significant and positive relationship between growth in product variety and productivity growth when condition on other variables such as research and development (R&D) employment, macroeconomic stability, and domestic security. These results are robust to the addition and subtraction of various explanatory variables but fragile with respect to an influential data point for Venezuela. Industrial nations tend to generate most of their productivity gains through R&D employment in a stable environment that results in better production processes and product quality. In contrast, the largest source of productivity growth in developing countries is product variety imitation while instability takes away from productivity. Addison tests various explanations for growth in variety. The results show that nations furthest from the frontier of observable variety tend to imitate fastest, with the ability to imitate being improved by educational attainment and by productivity gains. This could be a source of hope for small, less developed nations. Growth in market size was not correlated with growth in variety, though this may be due to a rather short sample period of only eight years. In addition to the empirical testing, Addison also contributes to a general discussion of measurement concepts and measurement issues related to product variety and sets out an agenda for further research.

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    Bibliographic Info

    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 3023.

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    Date of creation: 30 Apr 2003
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    Handle: RePEc:wbk:wbrwps:3023

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    Keywords: Economic Theory&Research; Economic Conditions and Volatility; Environmental Economics&Policies; Public Health Promotion; Health Monitoring&Evaluation; Economic Theory&Research; Achieving Shared Growth; Environmental Economics&Policies; Inequality; Economic Growth;

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    1. Rachel Griffith & Stephen Redding & John Van Reenen, 2000. "Mapping the two faces of R&D: productivity growth in a panel of OECD industries," IFS Working Papers W00/02, Institute for Fiscal Studies.
    2. By Michael Funke & Ralf Ruhwedel, 2001. "Product Variety and Economic Growth: Empirical Evidence for the OECD Countries," IMF Staff Papers, Palgrave Macmillan, vol. 48(2), pages 1.
    3. Hendry, David F., 2001. "Achievements and challenges in econometric methodology," Journal of Econometrics, Elsevier, vol. 100(1), pages 7-10, January.
    4. Gernot Doppelhofer & Ronald I. Miller & Xavier Sala-i-Martin, 2000. "Determinants of Long-Term Growth: A Bayesian Averaging of Classical Estimates (BACE) Approach," NBER Working Papers 7750, National Bureau of Economic Research, Inc.
    5. Robert C. Feenstra & Dorsati Madani & Tzu-Han Yang & Chi-Yuan Liang, 1997. "Testing Endogenous Growth in South Korea and Taiwan," NBER Working Papers 6028, National Bureau of Economic Research, Inc.
    6. Luís M. B. Cabral, 2000. "Introduction to Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262032864, December.
    7. Antonio Ciccone & Robert E. Hall, 1995. "Productivity and the density of economic activity," Economics Working Papers 120, Department of Economics and Business, Universitat Pompeu Fabra.
    8. Paul Romer, 1989. "Endogenous Technological Change," NBER Working Papers 3210, National Bureau of Economic Research, Inc.
    9. David Hummels & Peter J. Klenow, 2002. "The Variety and Quality of a Nation's Trade," NBER Working Papers 8712, National Bureau of Economic Research, Inc.
    10. Keller, Wolfgang, 1997. "How trade patterns and technology flows affect productivity growth," Policy Research Working Paper Series 1831, The World Bank.
    11. William Easterly & Sergio Rebelo, 1993. "Fiscal Policy and Economic Growth: An Empirical Investigation," NBER Working Papers 4499, National Bureau of Economic Research, Inc.
    12. Charles I. Jones, . "Growth: With or Without Scale Effects?," Working Papers 99001, Stanford University, Department of Economics.
    13. Jeffrey Sachs & Andrew Warner, 1995. "Economic Reform and the Progress of Global Integration," Harvard Institute of Economic Research Working Papers 1733, Harvard - Institute of Economic Research.
    14. Martin, Will & Mitra, Devashish, 1999. "Productivity growth and convergence in agriculture and manufacturing," Policy Research Working Paper Series 2171, The World Bank.
    15. Barro, Robert J. & Lee, Jong-Wha, 1994. "Sources of economic growth," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 40(1), pages 1-46, June.
    16. Krugman, Paul, 1980. "Scale Economies, Product Differentiation, and the Pattern of Trade," American Economic Review, American Economic Association, vol. 70(5), pages 950-59, December.
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    Cited by:
    1. Richard Frensch & Achim Schmillen, 2010. "Can we identify Balassa-Samuelson effects with measures of product variety?," Working Papers 288, Institut für Ost- und Südosteuropaforschung (Institute for East and South-East European Studies).
    2. World Bank, 2003. "Nigeria - Policy Options for Growth and Stability : Volume 1. Main Report," World Bank Other Operational Studies 14388, The World Bank.
    3. Frensch, Richard & Gaucaite Wittich, Vitalija, 2009. "Product variety and technical change," Journal of Development Economics, Elsevier, vol. 88(2), pages 242-257, March.

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