In this paper we present and estimate a continuous-time model of endogenous growth, business services and technology diffusion. We explore the role of business services in knowledge accumulation and growth and we study the determinants of knowledge diffusion including the role of distance as it evolves over time. The model is estimated on several European countries, Japan, and the United States. We then discuss the results of policy simulations to illustrate the benefits for European Union (EU) growth of the deepening of the single market, the reduction of regulatory barriers, and the accumulation of technology and human capital.
In March 2000 European leaders have launched the Lisbon Agenda, a comprehensive but interdependent set of reforms with the aim of making the EU the most dynamic and competitive knowledge-based economy. The reforms included making R&D a top priority and promoting the use of information and communication technologies (ICTs); completing the internal market with an urgent action to create a single market for services; creating an environment more supportive to businesses. However, until now, EU member states have failed to act on the Lisbon Agenda with sufficient urgency and the Lisbon objectives are far from being realized, as shown by the slow rates of growth of EU countries.
The findings of this paper lend support to the basic insights of the Lisbon Agenda as further emphasized in the Kok Report (2004) and suggest a set of policies that would help increasing the European growth rate. In particular we find that economic growth in Europe is enhanced to the extent that: trade in services increases, technology accumulation and diffusion increase and become less expensive over time (economic distance decreases also as a consequence of integration), regulation becomes both less intensive and more uniform across countries, and human capital accumulation increases in all countries (a possible result of integrating national education systems).
The paper is organised as follows. Section II presents the model including a many country version to clarify the mechanism of technology accumulation and diffusion. Section III presents the methodology, the data and the estimation results. Section IV discusses policy implications and simulation results and Section V presents concluding remarks.
Over the past decade, moving from the seminal contributions by Romer (1990), Grossman and Helpman (1991), and Aghion and Howitt (1992), economists have increasingly looked into the issue of integrating the accumulation of technology into growth models. Recently a few studies have explicitly modeled and estimated the process of generation and diffusion of technology (Eaton and Kortum, 1996, 1997, 1999; Keller, 2002; Peri, 2004). While the literature on technology and growth is well developed, few studies have investigated the role of business services in affecting growth through the diffusion of technology as well as technology spillovers through trade in services. Francois (1990) has shown that the realization of increasing returns