Relationship between Investment in Technology and Growth

The level at which an economy is able and utilizes technology and technological knowledge drives its Total Factor Productivity which in turn spurs growth. Investment can be of many forms investment in technology can be in machines and there is investment in human capital through education.According to Abbess and Peck (2008, p.2), “Human capital plays a key role in both neoclassical and endogenous growth models (Mankiw, Romer and Weil, 1992; Rebelo, 1991; Sianesi and Van Reenen, 2003). The critical difference is that in the first group, economic growth is ultimately driven by exogenous technical progress. Diminishing returns to accumulated factors, including human capital, eventually halt growth in a neoclassical model, in the absence of intervention from outside influences.

Policy changes can raise the level of productivity but not the long run growth rate. Endogenous growth models, on the other hand, need no additional explanation, for human capital investment propels knowledge creation without diminishing returns. A permanent alteration in some policy variable can cause a permanent change in an economy’s growth rate.”De Long and Summers (DS) (1991, 1992 and 1993 in Dulleck and Foster, 2008) found that there was a strong causal link between equipment investment and economic growth, confirming the traditional view that the accumulation of machinery is a prime determinant of national rates of productivity growth this views were also shared by Jones in (1994) who was considering the price of equipments and their relationship to growth.

De Long and Summers (1991) have been quoted to look in to economic history where several novel technologies were put together with capital goods, this suggested that introduction of new technology raises the TPF and thus investment in capital equipments is a requirement. New growth theories also find support for the same although they rely on the effect of externalities and spillovers to maintain the long run growth this views are as expressed by (Romer 1986 and Lucas, 1988 in Dulleck and foster, 2008 p. 2).

In Baro-Lee (2010, p.1) there are a number of researches such as (Lucas, 1988 and Mankiw, Romer and Weil, 1992) have pin pointed the importance of human capital especially that which is attained through education, to the economic development of an economy. A good supply of an educated community has been associated in the past with a notable level of labor productivity. It can also be said that mass number of educated workforce has a higher ability to take up advanced technology from developed countries.

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However, there are many factors that affect the growth of an economy other than human capital in terms of its education. The health, forms of education and experience also are major factors that affect growth. In old or neoclassical growth theories it was considered that capital was a major drive to economic growth however this capital did not include the human capital aspect this were views also shared by other authors like Lucas [1988], Rebelo [1991], Caballe and Santos [1993], Mulligan and Sala-i-Martin [1993], and Barro and Sala-i-Martin [1995a, Ch. 5] also seen in Barro 1996 p.7). This neoclassical growth theory was developed by researchers like (Ramsey (1928), Solow (1956), Swan (1956), Cass (1965), and Koopmans (1965) as seen in Barro, 1996 p.2). the most exploited aspect of this theory that ranged in the 60’s was the aspect of convergence; stated that the growth rate of an economy tended to be high if the starting GDP per capita was low.

The aspect of convergent as described above took advantage of the diminishing returns to capital in the neoclassical model. As an assumption, economies with less capital per worker are characterized by high return rates and growth rates. The aspect of convergence however was conditional because the propensity to save by every worker in that economy, the growth rate of the population and the position in the production function in the neoclassical model was dependent on the state levels of capital and the rate of output per worker and would vary between different economies. To minimize this the addition of sources of cross-economy variations like the government policies in respect to spending, consumption, protection of property rights and changes in domestic and international markets, need be factored in.

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According to (Parente and Prescott 1999 – 2000 in Abbas and Peck, 2008) the technical advancement in an extended neoclassical model can change in respect to policy as well. Individual preferences determine the speed of productivity growth, when time is changed from normal schedule of activities to those that improve technology. It is these activities that can borrow from the global stock of knowhow and borrow capital on global markets. Policy-induced hindrances, for example taxation, global capital constraints, barriers to trade industries entering the markets can create disincentives to make it happen. These gives rise to global differences in levels and growth of core productivity even when the stock of necessary knowledge has a potential common to all economies.

For countries that are underdeveloped or developing, productivity growth will majorly depend on the spread and absorption of technology not from the generation of new knowledge (Nelson and Phelps, 1966; Benhabib and Spiegel, 2002 in Abbass and Peck, 2008). The level to which these economies can absorb technology will depend on national institutions and policies, openness to foreign direct investment, regulation of intellectual property rights and exchange rate regimes as well as how frequent and fast they generate new and useful knowledge (Shapiro, 2005 in Abass and Peck, 2008). The frame of references on skills and the education and training that make them, will be a major consideration to how foreign knowledge will be used, together with coupling it as a conventional factor of production (Saggi, 2002, in Abbass and Peck, 2008)

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According to Dulleck and Foster (2006 p.247) they conclude that in the early 1990s technological investment could be casually associated with growth. Through this guiding, they found that there is a like relationship between imported technology and growth in developing economies. There is a noted high return on technological investment and thus supporting the results of growth. They hypothesized that human capital helps economies gain from technological investment. In these thy found that human capital was a necessity to growth of an economy where technology was to be invested in.

Another reason for new growth as expressed by Abbass and Peck (2008 p.3) follows that human capital is a factored in labor. A worker with high human capital raises their productivity but cannot benefit another worker in a like manner. The total amount of human capital in a nation is the product of all workers. It continues that with high investments in human and physical capital made so by an economy’s policy, can make the growth rate of that economy grow.

It is expected that technological investment is more likely to foster growth through education as a process likely to be strong where specialization in capital goods industries is a concern. Technological investment is diffused through equipment investment, given the nature of research and development in industries where technology is upheld such as the capital goods industry. Through the production of capital goods there are results in externalities that encourage innovation and that result in growth.

The neoclassical models on growth did not incorporate all factors necessary to spun growth in a long term manner thus resulted in the invention of the endogenous or new models of growth. This models incorporated factors such as research and development which when well purposed the activity rewarded in some form of ex-post monopoly power. Growth rate can be measured in the rate at which ideas can be spurned. According to Barro (1996 p.10), “If there is no tendency to run out of ideas, then growth rates can remain positive in the long run. The rate of growth and the underlying amount of inventive activity tend, however, not to be Pareto optimal because of distortions related to the creation of the new goods and methods of production. In these frameworks, the long-term growth rate depends on governmental actions, such as taxation, maintenance of law and order, provision of infrastructure services, protection of intellectual property rights, and regulations of international trade, financial markets, and other aspects of the economy. The government therefore has great potential for good or ill through its influence on the long-term rate of growth.”

Technological diffusion into developing economies tends to be cheaper than innovation. New theories on growth that include the invention of new ideas and means of production are more important in providing explanations for long term growth.  The recent cross-economic empirical work has gained so much inspiration for the extended older neoclassical theories. These theories are applicable in understanding government policies, human capital and technology diffusion to the developing countries from the developed economies. Theories of technological change are seemingly most important for understanding why the global economy as a whole can go ahead to grow indefinitely in per capita terms although they have little to do with the determination of relative growth rates across economies.

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