Technology and the Global Economy
* Eaton is a Research Associate in the NBER's Programs on International Trade
and Investment and on International Finance and Macroeconomics and a
Professor of Economics at Boston University. His "Profile" appears later in this
Since at least the eighteenth century, a good part of the world has
experienced ongoing gains in the standard of living, a process Simon Kuznets
has labeled "Modern Economic Growth." Economists have long sought to
understand the forces behind this phenomenon. Accumulation of physical capital
provided a simple and natural explanation. But Robert Solow's fundamental work
in the late 1950s showed that capital accumulation could account for less than
half of the growth in U.S. income per capita. Solow suggested that ongoing
improvements in technology might tell the rest of the story. While subsequent
work refined Solow's analysis, it did little to upset the basic conclusion that capital
accumulation provides a very incomplete explanation for why countries grow.
While interest in growth waned in the 1970s, the last decade and a half
has seen a resurgence of research on why incomes rise over time, and why
some countries are richer than others. There are now a number of elegant
theories of how technological progress drives growth. But in turning the spotlight
to technology rather than to investment, Solow made the job of quantifying the
sources of growth, and assessing how polices affect growth, much harder.
At the heart of the problem is measurement. We have imperfect, but
usable, ways to measure resources diverted from other uses toward investment
in capital. We can also gauge (much more roughly) how much capital is on hand.
Such measures give us some handle on capital's contribution to growth over time
and to differences in incomes across countries. But technology presents the
empirical economist with a much more elusive concept. We don't observe people
coming up with new ideas, and we can't systematically trace how these ideas
shape the process of production over time and space.
A number of basic questions, however, hinge on understanding how
innovations occur, and how these innovations raise income levels around the
world. For example: Do countries rely, for the most part, on their own
innovations, or are the gains from innovation largely shared? Where does most
innovation occur, and where are these innovations most rapidly put into practice?
To the extent that the benefits of innovation seep across borders, do these gains
spread through the exchange of products embodying these innovations, or
through the diffusion of the ideas themselves?
The answers to these questions are of intrinsic interest, but they are also
at the heart of any evaluation of the myriad government policies that affect
innovation. For instance: What are the benefits and costs of tougher patent
protection, and how are they shared across countries? Does a country recover
the costs of giving research expenditures favorable tax treatment, or are the
benefits largely dissipated through the diffusion of innovations abroad? What are
the gains from coordinating research policies internationally? To what extent
does greater openness spread the benefits of technical progress?
Samuel S. Kortum and I are engaged in a research project that attempts
to shed light on these issues. Our framework builds on recent advances in
growth theory and trade theory. We take this theoretical framework to a number
of sources of data. We look not only at productivity across countries and over
time; we also use data on research effort, patenting, education, and bilateral
Our research so far has pursued four broad sets of issues: 1) quantifying
the contributions of innovation and diffusion to world growth, 2) explaining
differences in research effort across countries, 3) analyzing the effects of national
technology policies in an international context, and 4) assessing the role of trade
in disseminating the benefits of technological advances between countries. I
discuss our results on each category, and then turn to work-in-progress.
World Growth and the International Diffusion of Technology
A series of papers has sought to trace productivity improvements in
different countries to the countries that generated the innovations behind them.1
Because they do nearly all of the world's research, we focus on countries that are
members of the Organization for Economic Cooperation and Development
We use output per worker as a measure of the extent to which countries
make use of innovations. Over the past two decades, OECD countries have
tended to grow at very similar rates, maintaining fairly stable relative productivity
levels. This observation is consistent with a world in which countries draw on a
common pool of inventions, with more productive countries taking advantage of
more of these ideas, or else implementing them more quickly. It also suggests
that not a great deal can be learned about growth by relating the growth rates of
different countries to various characteristics. Countries differ much more
systematically in their relative income levels than in their growth rates.
We turn to various measures of research effort to try to get some handle
on where innovative activity occurs. Such data include research expenditure
(private or overall) and research scientists and engineers (private sector or
overall). Whichever number one looks at, the message is that most research is
performed in just three countries: the United States, Germany, and Japan.
(France and the United Kingdom follow, not very closely, behind.) Not only do
these countries devote more resources toward R&D in absolute terms, but they
also devote a larger fraction of their resources toward R&D than any but a
handful of small, though technically advanced, countries such as Sweden and
Hence research activity is quite concentrated, but a number of countries
that do relatively little research enjoy high levels of productivity. For example, by
most measures, productivity levels in France and Germany are very similar, but
Germany does about twice as much research, both absolutely and relative to
size. Such observations suggest that a large number of countries make use of
innovations from a small number that concentrate on research.
Standard measures can thus give us some insight into who is benefiting
from innovations and who is doing research fairly straightforwardly. Even trickier
to determine is inferring whose innovations countries are tapping. For this
purpose we've turned to data on international patenting.
A feature of the international patenting system is that an inventor, in order
to obtain patent protection in any particular country, has to take out a patent
there. Applying for a patent is costly, and most inventions are patented in only
one country. Hence an inventor, in deciding to patent an invention in a particular
country, is likely to expect that the invention has some chance of being used
there. Observing, for example, the number of patents that French inventors take
out in Japan might tell us something about how much technology is flowing from
France to Japan. A French inventor would have little reason to apply for a patent
in Japan unless he or she thought it had a good shot at being used there sooner
or later. Of course other factors would affect the decision as well, such as the
cost of patenting in Japan, the size of the market there, and the quality of
protection that the Japanese patent system provides a French inventor. Inferring
the extent of technology diffusion from the patenting data requires taking these
other factors into account.
What patterns in international patenting do we observe? First, countries
that put the most resources into inventive activity do in fact patent most broadly.
The United States, Japan, and Germany dominate patenting by foreigners in
other OECD countries. Second, larger countries are much more popular
destinations for patent applications, suggesting that inventors do in fact find the
bother of applying for a patent much more worthwhile when the market in which
they are seeking protection is large. Third, for similar reasons, higher costs of
patenting (application fees, translation costs, and legal fees) tend to deter
patenting. (Patenting in Japan is particularly expensive for foreigners.) Fourth,
inventors are more likely to patent an invention at home than anywhere else.
Fifth, inventors are more likely to take out patents in nearby countries rather than
ones far away from their own. Japan, for example, is the largest foreign patenter
in the United States and, after the United States, in Canada. But in many
European countries, West Germany beats out Japan.
The data themselves provide a lot of insight about what is going on. But
getting a more precise picture of how innovation and diffusion drive world growth
requires embedding these data into a framework that accounts for how markets
allocate resources between current production and innovation, and how
innovators decide where to patent their inventions. For this purpose we use a
multicountry model of innovation and diffusion that incorporates these
A key goal is to assess the contribution that different countries are making
to growth around the world. Among other things, our approach allocates technical
progress in each country, its "Solow residual," to the countries whose innovations
drive it. What we learn is that the United States, Japan, and Germany are
overwhelmingly the major sources of innovation in the world economy: More than
half the growth of the countries we consider derives from innovations from these
three countries. While the extent of international diffusion is substantial, it is not
complete. Innovations appear to be about two-thirds as potent abroad as they
are at home, and each country makes its greatest contribution to growth at home.
Why Some Countries Do Much More Research than Others
On average, countries in Europe do less research than the United States
or Japan, not only in absolute terms but also relative to their size and resources.
Moreover, countries within Europe vary enormously in the share of resources
they devote toward research and in terms of how much patenting they do at
home and abroad.
Eva Gutierrez, Kortum, and I adapt our framework to evaluate alternative
explanations for cross-country differences in research effort.2 One possibility is
that these differences reflect specialization in more or less research-intensive
goods. Switzerland, for example, might do a lot of research because of its large
pharmaceutical industry, and pharmaceuticals are research-intensive. This
explanation holds water, of course, only if research needs to be done where the
inventions are used. We find, however, that countries that do a lot of research
tend to do it across the board, in all industries. Hence cross-country differences
in research effort seems to say more about differences in the countries
themselves than in the goods that they produce.
It may be that some countries are simply better at doing research than
others, or else that some countries provide greater rewards to doing research.
We find that the second explanation seems to have much more to do with why
many smaller European countries do so little research. Because of their small
size and the difficulty of appropriating returns to inventions abroad, firms in these
countries turn to other activities.
What Policy Can Do
Since patenting is a major component of our empirical analysis, a natural
question is what patent protection contributes to innovation and growth. In fact,
our results indicate that the current patent system provides only modest
protection from imitation. On the one hand, even if an idea is not patented, it may
take a while for someone to figure out how to copy it. On the other hand, patents
eventually expire, and even an active patent does not provide an ironclad
guarantee that an idea won't be stolen. Imitation is often hard to detect, and
enforcing the patent can be costly. These difficulties are especially formidable for
patents held abroad.
Indeed, we find that eliminating patent protection entirely would reduce
world incomes by fairly small amounts. At the same time, a patent system that
provides much tougher protection than the current one could do much to
Most policies toward technology are pursued nationally. But as long as
ideas cross borders, national policies have global effects. There are
consequently many reasons to think that countries might benefit from
coordinating and harmonizing technology policy. Gutierrez, Kortum, and I
consider various aspects of technology policy in Europe. We find that there is
enormous scope for free riding. Many policies that would benefit Europe as a
whole generate such large cross-border externalities that they are not worthwhile
at the national level. We find, for example, that tougher patent protection within
the European Union (EU) would raise incomes everywhere, but the increase
outside the EU is even greater. The reason is that non-EU countries benefit from
the stimulus to research but do not have to bear the cost of the more pervasive
monopoly power that tougher protection entails. Our results suggest that the
payoff to providing European inventors a common market for their ideas is
potentially quite large.
Technology and Trade
To what extent does trade bring the fruits of technological progress to
foreign shores? The idea that trade has an explanation in technology has its
origins with David Ricardo. But the Ricardian model has resisted generalization
to many countries and the incorporation of trade barriers -- two extensions
needed for any serious empirical analysis.
It turns out, however, that in our model of innovation these extensions are
quite straightforward. Kortum and I extend our framework to analyze bilateral
trade in manufactures among a sample of OECD countries.3
Among other things, we examine how the competing forces of technology
and geography shape production and trade patterns in manufacturing. When
transport costs are very high, countries with large internal markets tend to attract
manufacturing, since inputs tend to be much cheaper there. As transport costs
fall, large countries lose their edge to countries with better technology for
producing manufactures regardless of their size. We estimate, for example, that
a drop in transport costs from their current levels will tend to shift manufacturing
from Germany to Denmark, since the second country will then find its relative
isolation less of a handicap.
We also consider the classic question of the gains from trade in
manufactures among our sample of countries. A dramatic finding is the extent to
which they remain unexploited. At their current levels, trade barriers keep
countries much closer to a world of autarky than a world in which manufactured
goods could be moved costlessly across borders.
Given the size of current trade barriers, to what extent can trade spread
the benefits of technological progress through the exchange of goods embodying
innovations? We find that barriers are too high for trade to serve as the major
conduit for the spread of new technology except, in some cases, to small
countries very near the source of innovation. The results suggest that the
benefits of innovation spread primarily through the transmission of the ideas
themselves, rather than through the export of goods embodying them.
Our work on the topics discussed so far is largely complete, but we regard
it in large part as a platform from which to launch investigations of many
additional questions. Right now we are exploring three fronts.
One project is to examine the technology and trade issues that we have
raised here at a sectoral level. A particular question is the extent to which
countries carve out a comparative advantage in particular manufacturing
activities through research efforts. A second project seeks to complete the link
between our model of innovation and international trade: we explore the extent to
which openness to trade fosters innovation and growth. Finally, Kortum and I
have teamed up with Andrew Bernard and Brad Jensen to connect our work,
which focuses on aggregate measures of trade and innovation, with their work on
the productivity and export behavior of individual U.S. firms and establishments.
It turns out that our methodology provides a simple way to link aggregate with
plant-level data. A goal here is to understand the connection between factors that
affect trade at the aggregate level and what happens to individual plants. We can
relate, for example, the implications of greater openness for plant closings and
for the fraction of remaining plants that export.
These completed and ongoing projects all involve linking economic theory
to data about the world economy. A common goal is to provide a clearer
quantitative picture of the role of technology in the global economy.
1 J. Eaton and S. Kortum, "International Technology Diffusion," International
Economic Review forthcoming (originally published as "International Patenting
and Technology Diffusion," NBER Working Paper No.4931, November 1994); J.
Eaton and S. Kortum, "Trade in Ideas: Patenting and Productivity in the OECD,"
Journal of International Economics, 40 (May 1996), pp. 251-78; J. Eaton and S.
Kortum, "Engines of Growth in the World Economy," Japan and the World
Economy, (1997), pp. 235-59.
2 J. Eaton, E. Gutierrez, and S. Kortum, "European Technology Policy,"
Economic Policy, 27 (October 1998), pp. 405-38.
3 J. Eaton and S. Kortum, "Technology, Geography, and Trade" (originally
published as "Technology and Bilateral Trade," NBER Working Paper No. 6253,