Economists say that productivity growth—using labor and capital more efficiently—is the main driver of economic growth, rather than simply adding more labor or capital. Many also believe that the main driver of productivity growth is innovation.

A recent Economic Synopses essay from the St. Louis Federal Reserve says it’s not just simply about putting more resources into research and development (R&D).

Economist Ana Maria Santacreu says that the correlation between research intensity and economic growth isn’t very strong, with innovative activity concentrated in few rich countries. The U.S., South Korea, Japan and Germany account for the majority of global R&D.

“These ‘leaders’ are expanding the technology frontier,” Santacreu says. “However, countries farther behind the technology frontier—‘followers’—can also grow by importing technology from the leaders.”

She says that simply transferring technology from leader countries to follower countries is an important way for follower countries to grow. An example would be a multinational company with locations or partners in some of these countries.

Santacreu examined the roles of innovation and technology transfer in explaining productivity growth and convergence at the industry level for 19 countries and 10 manufacturing industries from 1999-2007:

  • She used total business R&D personnel (as a percentage of the total population) to measure R&D activity. And she used the gap in the level of total factor productivity (TFP) between the countries studied and the U.S. in 1999 to measure potential technology transfer.
  • Santacreu found positive and statistically significant effects of both factors on productivity growth.

Regarding technology transfer, Santacreu found that countries with a lower level of TFP relative to the U.S. (that is, a greater scope for importing technology) experience faster manufacturing productivity growth.

Regarding R&D activity, countries that invest more in R&D have a larger increase in productivity.

She wrote: “Taken together, the results show that both domestic innovation and technology transfer play a significant role in productivity growth. Given two country-industry pairs with the same productivity gap relative to the United States, the one that invests more in R&D will have faster productivity growth.”