Testing Endogenous Growth in South Korea and Taiwan

We evaluate the endogenous growth hypothesis using sectoral data for South Korea and Taiwan. Our empirical work relies on a direct measure of the variety of products from each sector which can serve as intermediate inputs or as final goods. We test whether changes in the variety of these inputs, for Taiwan relative to Korea, are correlated with the growth in total factor productivity (TFP) in each sector, again measured in Taiwan relative to Korea. We find that changes in relative product variety (entered as either a lag or a lead) have a positive and significant effect on TFP in eight of the sixteen sectors. Seven out of these eight sectors are what we classify as secondary industries, in that they rely on differentiated manufactured inputs, and therefore seem to fit the idea of endogenous growth. Among the primary industries that rely more heavily on natural resources, we find more mixed evidence.