On-line version ISSN 1015-8812
S. Afr. j. econ. manag. sci. vol.13 n.1 Pretoria Jan. 2010
Pei-Pei Chen; Rangan Gupta
Department of Economics, University of Pretoria
Recent studies have pointed out that trade liberalisation leads to technological spillovers, which tend to improve the efficiency of the domestic research and development (R&D) sector, and ultimately boost economic growth. In this paper, we theoretically formalise the above-mentioned relationship between trade openness and growth, via knowledge spillover in the R&D sector. We show that, under certain conditions, an increase in the degree of openness not only enhances growth, but also improves the standard of living. The study, thus, prescribes policies of developing and improving the domestic R&D sector in order to reap the benefits of trade liberalisation.
Keywords: Trade openness; growth; research and development.
JEL: F43; O32; 41
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Accepted June 2009
1 For a detailed literature review on the theoretical and empirical relationship between openness and growth, see Chen and Gupta (2009).
2 Rodriguez and Rodrik (2000), however, find little evidence that open trade policies are significantly associated with economic growth. They argue that in many cases the indicators of openness used are poor measures of trade barriers or are highly correlated with other sources of bad economic performance. Thus, methodological problems with the empirical strategies employed leave the results of the positive effect of openness on growth open to alternative interpretations.
3 See Aghion and Howitt (1996) for further details.
4 In an interesting study dealing with declining publication rate in South Africa, De Beer (2005) studied the dynamics of knowledge diffusion with specific reference to open access scholarly communication. She argued that knowledge diffusion and generation are the bases of sustainable economic growth by indicating that open access would go a long way in preventing marginalisation of science in and of developing countries, which, in turn, would reduce the levels of so-called "knowledge imperialism and dependence". In our context, this can easily be related to the reduction in restrictions for knowledge spillovers in the R&D sector of a developing economy.
5 As rightly indicated by one of the referees, the use of R&D requires adequate supplies of human capital, else the activity in this sector cannot be productive. Given this, one would probably want to broadly interpret the capital stock as incorporating both physical and human capital aspects. In any case, an increase in the degree of openness would improve the elasticity of knowledge creation with respect to the existing stock of knowledge and also affect the growth rate of the capital stock, besides the growth rate of new technology, which would, in turn, help propagate the process of technological progress further.
6 See below for further details in equation (17).
7 It is easy to see from Figure 3 that if ß + θ = 1 there is no equilibrium. However, if along with ß + θ = 1, n = 0, we have infinitely many stable steady-state equilibria.