1. technology and computing

Productivity growth in Eastern Europe. The role of capital imports and
local conditions.
Authors:
Maite Alguacil Marí (University Jaume I and Institute of International Economics, Spain)
Valeriano Martínez San Román (University of Cantabria, Spain)
Andrea Éltető (Institute of World Economics, CERS, Hungarian Academy of Sciences)
Abstract
The recent international crisis and the different recovery patterns of EU member states had
raised again the question of competitiveness. In the late nineties, the opportunities for
competitive improvements in post-transition economies were based on the foreign capital
flows and technology. After adhesion to the EU, productivity gains in these countries still
largely depend on their ability for foreign technology absorption and creation. In this paper,
we analyze the role of foreign technology (embodied in capital and intermediate goods
imports from more advanced countries) as a main driver of technology diffusion and
productivity growth in the Eastern European member countries. Particular attention is paid
to the sector composition of capital imports, and more specifically on whether the
productivity spillovers from the foreign technology adoption are different when looking at
manufacturing or services sector. Additionally, as technology diffusion depends on the
absorptive capacity, we control for the home country capability to domestically adopt
foreign technology, such as the human capital, the level of domestic technology and the
relative productivity level. We apply panel data analysis focusing on the period 1995-2012.
For a robustness analysis, two alternative econometric approaches (fixed effects and a
GMM estimation) have been used to estimate both the level and growth of productivity,
respectively. We have also considered the possibility of a different behavior in the
absorption capacity of foreign technology depending on economic behavior of countries.
To do that, we have splitted the sample in two groups: the Baltic countries and the Central
and South Eastern countries. Our results suggest that capital imports are productivity
enhancing in the Central and South Eastern European economies, but no evidence of this
effect is found for the Baltic countries. We also find that the technology diffusion through
capital import is greater in the manufacturing sector than in the services sector. Finally, our
estimates confirm the role of local conditions for the productivity performance.
Keywords: Productivity; Capital imports; R&D; Technology diffusion; CEECs.
JEL classification: C33; F14; F15
Introduction
Before and after the adhesion to the EU, the CEE region experienced considerable growth.
A major factor behind this growth was the growth of total factor productivity. Benkovskis
et al (2013) found that even between 1996 and 2007 productivity growth was generally
higher in CEE countries than in Western Europe.
Total factor productivity is a complex phenomenon that may be influenced by several
factors. In this paper we focus on two main factors: research and development activity
(from foreign and domestic sources) and human capital. Research and development
activities seem to be main engines for productivity gains. In large and “capital-strong”
developed countries, domestic R&D activity is especially significant, either financed by the
state and by the business sector. In the case of the CEE countries, however, the lack of
domestic capital has been substituted by foreign capital from the nineties on. In certain
countries and sectors foreign firms have been financing R&D activity to a large extent or
almost entirely. Foreign multinational companies established affiliates and to a certain
extent transferred knowledge and technology to CEE economies, thus enhancing
productivity. The productivity effects linked to foreign direct investments have been widely
described in the literature (see Javorcik, 2008, for an excellent survey).
Apart from foreign investments, imported capital goods are also a foreign source of
technology diffusion and productivity growth. A country’s productivity thus depends on its
own R&D capital stock, but also on the R&D capital stocks of its trade partners. As new
technology is embodied in capital and intermediate goods, the direct import of these goods
is a channel of transmission (Keller, 2004 and Acharya and Keller, 2009). Indeed there are
studies according to which the impact of foreign intermediate imports is more important for
smaller countries than larger ones (Barba Navaretti and Tarr, 2000; Keller, 2004).
Similarly, Coe and Helpman (1995) find that foreign R&D may have a stronger effect on
domestic productivity the more open an economy is to international trade.
The magnitude of the spillovers also depends on the local capacity to successfully adopt
foreign technology. The assimilation of knowledge spillovers will be greater the higher the
absorptive capacity of the host country. For Glass and Saggi (1998), barriers to technology
adoption help to explain the income gap between developed and developing countries.
Three major determinants have been emphasized as the main local factors that facilitate
technology adoption: domestic R&D, human capital and openness to trade (Benhabib and
Spiegel, 1994; Borenzstein et al, 1998; and Keller, 2004). According to Griffith et al.
(2004), domestic R&D and human capital are key factors for the success in adopting
foreign technology when these are employed in “imitative” or “adaptative” research
activities. Keller (2004) and Henry et al. (2009) also emphasizes the role played by research
and development expenditures and human capital in providing the necessary skills for
technology adoption.
The extent of technology diffusion may depend also on the technological gap (Benhabib
and Spiegel, 1994). From one point of view, the potential benefits from foreign technology
transfer will be greater as higher the technological gap is. From another aspect, the degree
of success in adopting foreign technology is lower as technological distance increases
(Crespo et al, 2002). Adoption of foreign technology was helped in CEE countries by the
well educated workforce despite the large technology gap in this region.
In this paper, we try a number of contributions. Firstly, we investigate formally the role of
capital goods imports as the main drivers of technology diffusion and productivity growth
in Eastern European countries (Bulgaria, Czech Republic, Estonia, Hungary, Lithuania,
Latvia, Poland, Romania, Slovakia Republic, and Slovenia). Secondly, this paper shows
how the link between labor productivity and capital goods imports depends on the
absorptive capacity of the recipient country, and particularly on human capital, domestic
innovation and the relative productivity level of the recipient country (technological gap). Third, in the evaluation of the productivity impact of international technology transfers
through capital imports we have considered two forms of heterogeneity: the sector
composition of capital imports and the different level of development of countries. Finally, we adopt two alternative econometric models. On the one hand, an equation describing
productivity has been estimated by fixed effects method. On the other hand, a productivity
growth model (in line with the growth literature) has been estimated by the system GMM
estimation procedure. The use two methodologies allow us to obtain more robust results.
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