The Role of Public Policies in Fostering Innovation and Growth: Theory and Empirical Evidence

This survey outlines the literature on economic growth and development with respect to the following questions: (a) To what extent do public policies influence economic growth? (b) Which policy mix might optimize a country’s rate of growth and development? While the importance of identifying the key determinants of economic growth is obvious, a unified theory that matches empirical facts is still missing. It is shown that a successful theory needs to explain why some countries catch up in terms of productivity while others lag behind. This literature review demonstrates that public policies influence a country’s productivity growth rate in several different ways. However, it also demonstrates that policy effects are often far from obvious ex ante. Instead, some detailed knowledge of the stage of developments or country-specific characteristics are necessary to achieve the desired outcomes. “economies that adopt the formal rules of another economy will have very different performance characteristics than the first economy because of different informal norms and enforcement [with the implication that] transferring the formal political and economic rules of successful Western economies to third-world and Eastern European economies is not a sufficient condition for good economic performance.” – North (1994, p 8) “Institutional copycatting may have been useful for Poland, but it is much less clear that it was relevant or practical for Ukraine or Kyrgyzstan.” – Rodrik (2005, Handbook of Economic Growth, Elsevier, Amsterdam, p 29)