due to specialization depends on the expansion of producer services which play an important role in the linkage, coordination and control of specialized, interdependent operations. Mun and Nadiri (2002) have shown the role of Information Technology externalities in explaining considerable parts of Total Factor Productivity (TFP) growth estimating a cost function.
Differently from Mun and Nadiri (2002) we directly model output growth by endogenizing both the creation and diffusion of technology and the production and imports of business services. Our model is articulated enough to take into account a number of channels through which the interaction between technology accumulation, services, and innovation diffusion take place in the context of EU integration. This also allows to draw a number of policy implications for the European growth strategy.
The structure of the model is as follows. Output growth is a function of (exogenous) labor and capital accumulation as well as of endogenous accumulation of technology and business services. Business services, including communication, financial services and insurance, both domestically produced and imported, grow with output and with technology reflecting the idea that the share of “advanced” services in the economy increases with technology accumulation. The role of business services in technologically driven growth is a novel feature. Indeed the literature has so far devoted little attention to the tertiary sector as driver of technology accumulation while empirical analyses have almost entirely focused on the interaction between technology accumulation and growth of the manufacturing sector.
We also take into account the role of the composition of the manufacturing sector for producing and importing business services. This can be interpreted both as the direct stimulus coming from a higher level of intermediate demand and as the result of knowledge flows associated with forward linkages or “spillovers.” Moreover, technological change leads to a “splintering” process, by which services (in particular, business services) spring from the increased technical and social division of labor within production, engendering a strong interdependence between manufacturing and service activities (Francois, 1990; Diaz Fuentes, 1998).
Technology grows with output, services and, through diffusion, with foreign technology, also given the contribution of exogenous variables (human capital in both receiving and sender countries). To measure technology, we consider patent citations as a “direct measure” of innovation output. However, we also consider total spending on Information and Communication Technologies (ICT) as an “indirect measure” of innovation. As is well known traditional technological variables, such as R&D expenditures and patents do not capture entirely innovation in business services. In fact, although manufacturing sectors spend more on R&D and generate more patents than service sectors, if technological innovation is understood as affecting marketing, training and other activities, many services are more technology intensive than generally considered (Tomlinson, 2001). At the same time the diffusion of knowledge-intensive service industries is deeply affected by the parallel diffusion and implementation of the new information and communication technology systems (Antonelli, 1998). The intangible and information-based nature of services gives the generation and use of ICTs a central role in innovation activities and performance that cannot be captured entirely by patents (Evangelista, 2000).