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Why is Europe lagging behind?

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  • Pyyhtiä, Ilmo

Abstract

This paper builds on the literature on growth in searching for explanations for the divergent growth performance between the EU countries and the United States.We emphasise the role of R&D investment and perhaps different degrees of elasticity of substitution between capital and labour.We estimate two different production functions, namely Cobb-Douglas and CES specifications, with physical capital, a measure of labour, and residual 'technical trend' as inputs.Our first finding is that in many ICT-producing and using countries such as Denmark, Finland, Ireland, Sweden and the United States technical progress has been accelerating during the past decade.Secondly, this speeding up of technical progress has been associated with R&D investment and perhaps with increasing elasticity of substitution between capital and labour.Hence, our results suggest that there is no growth paradox in Europe: the R&D factor and the elasticity of substitution between capital and labour which have been known to be important factors of economies' growth potential, actually explain a significant part of the divergent growth performance of the European economies as well.

Suggested Citation

  • Pyyhtiä, Ilmo, 2007. "Why is Europe lagging behind?," Bank of Finland Research Discussion Papers 3/2007, Bank of Finland.
    • Handle: RePEc:zbw:bofrdp:rdp2007_003
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    More about this item

    Keywords

    endogenous growth; panel data estimation; production function; R&D; technical progress; elasticity of substitution;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • O51 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - U.S.; Canada
    • O52 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Europe

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