Endogenous Convergence and International Technological Diffusion Channels

The goal of the paper is to estimate relative importance of channels of technological diffusion between new member states and core EU countries. Based on neoclassical growth theory and extensive literature survey on technological diffusion we explore movements in the relative TFP in EU member states and try to identify relative importance of channels of technological diffusion as suggested by theory: imports, exports, FDI, R&D, human capital and fixed capital formation, etc. In the first step we employ Phillips and Sul (2007) log t test which has power to detect convergence even in the absence of cointegration between time series. In the second part we employ Abrigo and Love (2016) PVAR model in order to detect channels of diffusion of technology. The data is sampled from Eurostat and PWT repository and covers the period from 1995-2016 for all EU member countries. Contrary to conventional wisdom, our preliminary results suggest that trade openness as an important channel for TFP diffusion. The overall results point that productivity gap reduction is a heterogeneous process, country specific problem, but on average it can be supported through various economic policies focused on openness. Relative importance of other factors of technological convergence is statistically less relevant or even has opposite direction of causality. Peculiar results for relative importance of FDI and R&D is further explored in terms of the structure and general nature of FDI flows during the investigated transition and accession period.