World’s Knowledge Spillovers : Beyond Openness and Growth

Capital goods industries, for example, nuclear reactors, steam and vapour turbines, air or gas compressors, filtering or purifying machinery and apparatus are intrinsically heterogeneous in terms of vintages and the level of technological knowledge embodied in their products. Countries decide to import wide range of varieties from different sources, which has a bearing on their growth rates. The present paper analyses the hypothesis that the types of imported capital goods and the sources of their origin matter for growth. We construct a new index that measures the level of knowledge embodied in a country’s import basket of capital goods. Using the instrumental variable method, we find that the high initial value of this index for the year 1995, leads to high growth rate of per capita income in the subsequent years during 1995~2005, that is, 10 percent increase in the value of the index raises growth rate by 2 to 3 percentage points. This paper looks beyond the simple relationship between trade openness and growth.