Aggregate Production Function for Knowledge Economies in Asia: System Gmm Inference

• Author: BILAL MEHMOOD and HAFEEZ UR REHMAN

Abstract

Growth empirics usually overlook the importance of knowledge and technology as determinants of growth and their complementarities with other factors. This paper develops a model to explain the role of knowledge, capital formation, interaction effects of tertiary education with information and communication technology and knowledge as determinants of economic growth. Sample of Asian countries have been used to analyze this model called as Tech-Know Income Model. Using dynamic specification of panel data model, data of selected Asian countries from 2000-2010 is analyzed. In empirical results, knowledge is found to be a significant factor of growth.

Tech-Know income model confirms the importance of traditional factor of growth like 'capital formation' and 'trade' in addition to newer factors like 'interaction effects' of information and communication technology and knowledge with human capital. Recommendations are made to improve the quality of tertiary education and to focus on economically productive research specific to local needs of developing countries for ameliorated macroeconomic performance.

Keywords: Growth empirics, Information and communication technology, Knowledge, Interaction effects

1. INTRODUCTION

   Knowledge-based economy has been considered a buzzword of recent times. But it has become a standard term in the field of development economics. It can be attributed to philosophical (epistemological), mathematical (cybernetic), economic (informational) and national accounting foundations provided in Machlup (1962). The term 'knowledge-based economy' has replaced 'traditional economy' due to increasing importance of knowledge in economic processes in every sector of an economy. For instance, in European Union, the launch of the Lisbon Strategy has initiated introduction of employment and productivity augmenting reforms in Europe "to become the most competitive and dynamic knowledge-based economy in the world capable of sustainable economic growth with more and better jobs and greater social cohesion" (European Commission, 2000). Such policy steps normally boost the information society via increased RandD and accelerates structural transformations for increased competitiveness.

   Asian Region has been a target of focus of many researchers in recent times. Similar steps in this region may have interesting implications. Policies and investments associated with the transition to a knowledge-based economy (for instance Research and Development expenditures, skilled human resources, innovative capacity, diffusion of ICT and information society) can be linked with higher economic growth rates.

   This paper considering the importance of this contemporary shift in Economic literature, estimates the impact of knowledge on macroeconomic performance in Asian countries. In addition to conventional factor of growth (capital formation), the model developed in this study includes role of technology and trade.

   Knowledge is intangible and intermingling phenomenon. Literature resorts to knowledge by using various terminologies like 'intangibles', 'intellectual capital', 'knowledge capital' and 'intangible assets' among others. Knowledge becomes economically meaningful when converted into services or used to innovate (goods). In the post-industrial era, knowledge intensive industries have become an important part of macro-economy.

   Accordingly, this paper inquires knowledge as a determinant of national income among Asian countries.

2. EMPIRICAL REVIEW

   As per empirical literature (Romer, 1986, 1990; Lucas, 1988), economically meaningful knowledge can create new businesses, employment opportunities and other positive externalities. Benhabib and Speigal (1994) find that countries that spend in education and skill formation are able to exploit new openings, and to invent and implement new technology. Harris (1999) is of the point of view that human capital is pivotal in nurturing productivity because it facilitates knowledge externalities and implementation of novel technology. In a micro-level study, Black and Lynch (1996) find a positive relationship between level of education and manufacturing productivity as well as non-manufacturing productivity.

   Broersma et al. (2003) show the impact of ICT infrastructure in easing reach to knowledge and stimulating the blowout of ideas. Firm related studies firmly back the opinion that ICT investment, when convoyed by organizational change and worker skills, increase firm productivity in manufacturing and services sector. Gera et al. (1999) maintain that international RandD externalities embodied in IT imports have a favorable impact on labor productivity growth. As regards to European Union and ICT exploitation, it is observed that its member states have not exploited ICT growth capabilities, as compared to USA (Colecchia and Schreyer, 2002).

   A more consolidated macro-level study is by Karagiannis (2007) who has conducted regression analysis for European Union using knowledge as a determinant of economic growth. Author's deployment of empirics on European Union shows that RandD expenditure initiated from other countries contributes to GDP. Azari and Pick (2009) highlight the importance of intangible knowledge for developing countries and assert that access to ICT is an incomplete solution of problem. In their opinion, key to development is an environment that nurtures innovation and knowledge sharing. This paper is an attempt to quantitatively assess the role of knowledge capital in macroeconomic performance for Asian countries. In addition, to conventional determinants of growth (capital formation and trade), this paper includes contemporary ingredients of growth namely information and communication technology...