TY - JOUR AU - Aghion,Philippe AU - Comin,Diego AU - Howitt,Peter TI - When Does Domestic Saving Matter for Economic Growth? JF - National Bureau of Economic Research Working Paper Series VL - No. 12275 PY - 2006 Y2 - June 2006 UR - http://www.nber.org/papers/w12275 L1 - http://www.nber.org/papers/w12275.pdf N1 - Author contact info: Philippe Aghion Department of Economics Harvard University 1805 Cambridge St Cambridge, MA 02138 Tel: 617/495-6675 Fax: 617/495-4341 E-Mail: paghion@fas.harvard.edu Diego A. Comin Harvard Business School Soldiers Field Boston, MA 02163 Tel: 617/495-5011 E-Mail: dcomin@hbs.edu Peter Howitt Department of Economics Brown University, Box B Providence, RI 02912 Tel: 401/863-2145 Fax: 401/863-1970 E-Mail: peter_howitt@brown.edu M2 - featured in NBER digest on 2006-06-05 AB - Can a country grow faster by saving more? We address this question both theoretically and empirically. In our model, growth results from innovations that allow local sectors to catch up with the frontier technology. In relatively poor countries, catching up with the frontier requires the involvement of a foreign investor, who is familiar with the frontier technology, together with effort on the part of a local bank, who can directly monitor local projects to which the technology must be adapted. In such a country, local saving matters for innovation, and therefore growth, because it allows the domestic bank to cofinance projects and thus to attract foreign investment. But in countries close to the frontier, local firms are familiar with the frontier technology, and therefore do not need to attract foreign investment to undertake an innovation project, so local saving does not matter for growth. In our empirical exploration we show that lagged savings is significantly associated with productivity growth for poor but not for rich countries. This effect operates entirely through TFP rather than through capital accumulation. Further, we show that savings is significantly associated with higher levels of FDI inflows and equipment imports and that the effect that these have on growth is significantly larger for poor countries than rich. ER -