Trade and Sectoral Productivity Convergence: A Multi-Country Dynamic Analysis

Abstract

An important implication of international technology diffusion in the context of the endogenous growth model is that productivity converges among countries through global linkages such as trade. Productivity convergence also has an important economic implication on how international linkages impact on the integration of real economic activities across countries, and how foreign economic policy impacts on the domestic economy. While previous research utilized a simple regression analysis, this study develops and employs a multi-country dynamic framework of technology diffusion with the consideration of sectoral differences to examine productivity convergence. I have employed the technique of Vector Autoregression (VAR) and impulse response function to investigate both the short-run & the long-run convergence property of six sectors for 14 OECD countries from 1970 to 1997. Empirical results provide the evidence for a significant sectoral productivity convergence in the long-run among trade partners, especially in the manufacturing industry, and faster speed of convergence in manufacturing productivity. It implies that global linkages such as trade matter for co-movement of real economic activity, particularly in the productivity convergence across countries.