Productivity Growth and Product Variety : Gains from Imitation and Education

Is there a correlation between productivity and product variety? Certainly it appears that the rich countries are more productive and have more product variety than the poor nations. In fact, the relationship is quite strong when measured in levels...

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Bibliographic Details
Main Author:	Addison, Douglas M.
Format:	Policy Research Working Paper
Language:	English en_US
Published:	World Bank, Washington, DC 2014
Subjects:	AVERAGE GROWTH AVERAGE GROWTH RATE AVERAGE RATE CAPITAL GOODS CAPITAL GROWTH CAPITAL STOCK CAPITAL STOCK GROWTH CONSUMER PREFERENCES CONSUMER PRICE INFLATION CONSUMERS COUNTRY CHARACTERISTICS COUNTRY OBSERVATIONS COUNTRY SIZE COURNOT COMPETITION CPI DEMAND SIDE DESCRIPTIVE STATISTICS DEVELOPED COUNTRIES DEVELOPING COUNTRIES DEVELOPMENT POLICY ECONOMIC DEVELOPMENT ECONOMIC THEORY ECONOMISTS EDUCATIONAL ATTAINMENT ELASTICITY EMPIRICAL LITERATURE EMPIRICAL RESEARCH EMPIRICAL WORK EMPLOYMENT ENDOGENOUS GROWTH ENDOGENOUS REGRESSORS ENDOGENOUS VARIABLES EQUATIONS ERROR TERM EXOGENOUS VARIABLES EXPLANATORY POWER EXPLANATORY VARIABLES EXPORTS FACTOR ACCUMULATION FIXED COSTS FIXED EFFECTS FOREIGN INVESTMENT FUNCTIONAL FORM FUTURE RESEARCH GDP GDP PER CAPITA GOVERNMENT EXPENDITURES GROWTH RATE GROWTH RATES HETEROSKEDASTICITY HUMAN CAPITAL IMPERFECT COMPETITION IMPORTS INCOME INCREASING RETURNS INCREASING RETURNS TO SCALE INDEPENDENT VARIABLES INDIVIDUAL COUNTRIES INFLATION INFLATION RATE INTERMEDIATE GOODS INTERNATIONAL TRADE LABOR FORCE LABOR FORCE GROWTH LIFE EXPECTANCY MACRO STABILITY MACROECONOMIC INSTABILITY MACROECONOMIC MANAGEMENT MARGINAL RETURNS MEASUREMENT ERROR MODEL SPECIFICATIONS NEGATIVE GROWTH 0 HYPOTHESIS OBSERVED CHANGES OIL OPEC OUTPUT GROWTH POLICY IMPLICATIONS POLICY RESEARCH POPULATION GROWTH POSITIVE CORRELATION POSITIVE RELATIONSHIP POVERTY REDUCTION PRODUCERS PRODUCT DIFFERENTIATION PRODUCTION FUNCTION PRODUCTION PROCESSES PRODUCTIVITY PRODUCTIVITY GROWTH PUBLIC INVESTMENT REAL EXCHANGE RATE REAL GROWTH RICH COUNTRIES SIGNIFICANT CORRELATION STANDARD DEVIATION TELECOMMUNICATIONS TFP TOTAL FACTOR PRODUCTIVITY TRADE POLICIES URBAN AREAS PRODUCTIVITY MACROECONOMIC STABILITY THEORY HYPOTHESIS TESTING STATISTICAL DATA URBAN AREAS
Online Access:	http://documents.worldbank.org/curated/en/2003/04/2300153/productivity-growth-product-variety-gains-imitation-education http://hdl.handle.net/10986/18252

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Summary:	Is there a correlation between productivity and product variety? Certainly it appears that the rich countries are more productive and have more product variety than the poor nations. In fact, the relationship is quite strong when measured in levels. Does this same correlation hold up when measured in growth rates? If so, can poor countries imitate the success of the rich? Addison provides theoretical and empirical reasons to believe the answer to both questions is yes. Recent economic theory suggests that rising variety in factor inputs can help avoid diminishing marginal returns. Product variety can also sustain learning-by-doing which would otherwise be exhausted in a fixed number of products. Finally, invention or imitation adds to the stock of non-rival knowledge. There have been only two previous empirical tests of the correlation between growth in product variety and productivity growth. Both were affirmative but neither examined a wide range of developing countries and neither looked deeper to test what might drive product variety. This research is based on a cross-country sample of 29 countries (13 rich and 16 poor). The data display a statistically significant and positive relationship between growth in product variety and productivity growth when condition on other variables such as research and development (R&D) employment, macroeconomic stability, and domestic security. These results are robust to the addition and subtraction of various explanatory variables but fragile with respect to an influential data point for Venezuela. Industrial nations tend to generate most of their productivity gains through R&D employment in a stable environment that results in better production processes and product quality. In contrast, the largest source of productivity growth in developing countries is product variety imitation while instability takes away from productivity. Addison tests various explanations for growth in variety. The results show that nations furthest from the frontier of observable variety tend to imitate fastest, with the ability to imitate being improved by educational attainment and by productivity gains. This could be a source of hope for small, less developed nations. Growth in market size was not correlated with growth in variety, though this may be due to a rather short sample period of only eight years. In addition to the empirical testing, Addison also contributes to a general discussion of measurement concepts and measurement issues related to product variety and sets out an agenda for further research.

Productivity Growth and Product Variety : Gains from Imitation and Education

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