Institutions, Technological Change and Economic Growth

Theories of economic growth try to explain variations in per capita income across countries by differences in capital accumulation and productivity. However, many scholars consider that integrating institutions into economic theory and economic history is an essential step in improving explanations of why some societies are richer than others. This paper develops the empirical and theoretical case that differences in institutions are the fundamental cause of differences in technological change (productivity), hence in economic growth. First, I give a definition of institutions and how they influence economic performance, from a New Institutional Economics point of view. Then, I introduce the theoretical framework based on the economics of ideas and endogenous growth models. Finally, I argue that R&D expenditures -a proxy for technological change- will vary across countries depending on some measures of institutional quality. In the end, this paper finds that stronger institutions (measured by an aggregate of institutional quality) encourage greater R&D expenditures. At a disaggregate level, the rule of law is positively correlated and the regulatory burden is negatively correlated with R&D expenditures. Human capital level (measured by the tertiary and primary school enrolment rates) has also a significant positive impact in R&D expenditures.