Technological Change and Economic Growth - Example

Running Head: Technological Change and Economic Growth Technological Change and Economic Growth [Institute’s Table of Contents Table of Contents 2 Role of Technological Change and Economic Growth 3 Technology Indicators 5 Foreign Direct Investment 5 Public Spending on Education 6 Rate of Unemployment 6 High Technology Exports 6 GDP Growth 6 Comparison of Countries 7 Conclusion 8 References 9 Role of Technological Change and Economic Growth In recent years, the world has witnessed a huge wave of technological advancements that have changed the way things used to happen. Particularly, this technological change has not remained as a notion in isolation but it has resulted in globalisation that has turned the whole world into a small global village where different countries are now connected with each other and actions of one country affect processes in another country. Moreover, it is very essential to understand here that technology does not refer only to the information and technology but it signifies the transfer of knowledge, both theoretical and practical knowledge (Amesse & Cohendet, 2001, pp. 1459-1478) that influences the process of development positively and/or negatively. In order to understand the role of technological change in economic growth and broadly, economic development, it is very imperative to understand the definition of the terms itself that will subsequently indicate the role. Particularly, it has been an observation that economic development (Borensztein & Lee, 1995, pp. 115-124) has often been taken only in terms of economic progress of a state; in other words, in terms of its gross domestic production. However, in current era, economic development is more than an increase in GDP and various factors play a role in determining positive or negative economic development of a country. More importantly, any factor that may contribute towards enhancement of quality of life of population, it is considered as economic development. For instance, the World Bank (2013) has identified various technological indicators that play a significant role in determining economic development of a country. For instance, some of such indicators are “climate change, education, environment, foreign direct investment, rate of unemployment, life expectancy rate, tax revenue, investment in research and development” (World Bank, 2013). Here, one can notice various indicators in this list cannot be analysed quantitatively and therefore, economic development is more than quantitative progress of a country. The World Bank (2013) data confirms strong relationship of technological change with economic growth of countries. Analysis of its findings has indicated that countries that have invested more in technological advancements, especially in the sectors of education and business have been successful in providing basic facilities to its population, which has resulted in their overall economic growth and/or development. In other words, when a government ensures secure and encouraging social environment by working towards increased technological advancements, it automatically results in higher economic growth of the country. This surely is an indication of the role of technological changes that facilitates economic growth of a country. While the paper includes discussion on the role of technological change in economic growth of a country, it will be inappropriate to overlook the particular role of multinational enterprises that they play by bringing FDIs especially in developing countries. For many decades, quantitative indicator of economic growth (Victor, 2008, pp. 5-11) has remained an essential requisite for developing countries to transform into modern and developed economies. In the year 1972, Gould (pg. 1) defined economic growth as “the sustained increase in real per capita incomes.” Here, one can see that economic growth does not consider short-term alterations since it focuses on ‘sustained increase’. In this regard, one cannot overlook the significant role of multinational enterprises since they cause sustained increase in a country by bringing in their investments (Mukherjee, 2002, pg. 239), which certainly results in a positive shift in the production possibility curve (PPC) of a country. In this regard, analysis of the role of multinational enterprises is an effective way of analysing the role of technological changes in economic growth or development of a country. As economic growth refers to increment in national income of the country that government usually achieves by encouraging foreign investments that consequently results in an increase in production and consumption (Clarke & Islam, 2004, pp. 31-39). Moreover, FDIs along with financial investments facilitate an increase in employment-related opportunities affecting this technological indicator positively. Moreover, here, FDIs do not only represent the financial investments that the multinational enterprises bring in. However, FDIs here also signify the knowledge that companies bring in the countries through their skilled and trained staff, managerial experiences, and technologies (Blomstrom & Kokko, 2003, n.p) that influence almost all sectors of the country from education to business and from health to social progress of a country. In other words, analysis of different literature has indicated that innovation is one of the major factors that influence economic development in a country, and multinational companies play a crucial role in introducing the trend of innovation in a host country, especially developing countries. Technology Indicators As discussed earlier, the World Bank has identified different indicators that allow assessment of a country’s economic development. In this regard, the paper will now include some of the indicators that will allow a practical understanding of the topic. Foreign Direct Investment Particularly, foreign direct investment is the “sum of equity capital, reinvestment of earnings, other long-term capital, and short-term capital as shown in the balance of payments” (World Bank, 2013) Public Spending on Education Besides FDIs, it is an understanding that education is one of the sectors that have enabled civilizations and countries to prosper even while facing lack of resources. In every budget, governments decided a particular percentage of GDP that will be used on the education. In this regard, this indicator will also be very effective in understanding the role of technological change in economic growth of a country. Rate of Unemployment According to the World Bank (2013), unemployment refers to “the share of the labor force that is without work but available for and seeking employment”. It has been an observation that different countries define unemployment in a varying manner; however, still, based on average data, the paper will try to identify the relationship of economic growth with this technological indicator. High Technology Exports This is an era of information and technology where countries with domination in technology are prospering and thus, this indicator will be helpful. GDP Growth Last but most important, growth rate of GDP is the deciding factor that determines overall economic growth of a country. Particularly, GDP is the “sum of gross value added by all resident producers in the economy plus any product taxes and minus any subsidies not included in the value of the products” (World Bank, 2013). Comparison of Countries Countries High Technology Exports Public Spending on Education (% of GDP) Unemployment (% of total labor) Foreign Direct Investment GDP Growth (Annual %) China 406,089,687,680 3.69 4.1 243,703,434,560 10.4 India 10,086,626,314 3.3 3.5 26,502,000,000 10.5 Malaysia 59,331,817,835 5.1 3.4 9,167,201,907 7.2 South Africa 1,420,049,199 6.0 24.7 1,224,280,433 2.9 (World Bank, 2013) Abovementioned table indicates data gathered from World Bank (2013) website for the year 2010. Although the table itself is self-explanatory, however, the paper will include brief discussion to compare different countries in this table that will allow a practical understanding of the role of technological change in economic growth of a country. As discussed earlier in the paper, multinational enterprises play a crucial role in determining economic growth of a country. In this regard, one can clearly see the difference between FDI coming in China and rest of the countries, such as India, Malaysia, and South Africa in this table. FDIs along with assets and capital investments bring technological knowledge in the country, which enables the country to train its local workforce, which somehow benefits not only the multinational but also the whole country. The table clearly shows the relationship between the amounts of FDI and technology exports. Although there is a direct relationship between indicator of FDI and technology exports, however, one may see lack of this relationship in the case of India where the exports are not coherent in terms of the amount of FDI, as Malaysia has higher volume of such exports. In this case, one can relate indicator of ‘public spending on education’ that clearly shows its positive effect on Malaysia’s export. In this regard, it will be inappropriate to state that a single technological indicator can determine economic growth of a country, and thus, various technological changes play important roles in economic development. Conclusion From abovementioned understanding of the role of technological change and economic growth, and from realization of presence of various diverse indicators that determine economic growth, the best policy recommendation will be that government should identify and prioritize technological areas according to their resources, needs, requirements, and context. Education is one of the significant areas that play a significant role in facilitating governments to create trained and skilled labor force that can respond to expectations of the multinational enterprises that invest in developing countries. At the same time, the government should introduce policies that may encourage greater participation of MNCs, such as the Indian policy of liberalisation that encouraged more MNCs and FDIs after 1991 resulting in significant effect on economic growth of the country. Conclusively, technological changes play a considerable role in economic growth of a country; however, countries intending to have rapid economic growth will have to come out of local shell and introduce globalised policies that will enable them to become one of the modern economies of the world. References Amesse, F. and Cohendet, P. 2001. “Technology transfer revisited from the perspective of the knowledge-based economy.” Research Policy. Vol. 30, pp. 1459-1478. Blomstrom, M. and Kokko, A. 2003. “The Economics of Foreign Direct Investment Incentives.” Working Paper No. 9489, NBER. Borensztein, E., and Lee, J. 1995. “How does Foreign Direct Investment Affect Growth.” Journal of International Economics. Vol. 45, pp. 115-135. Clarke, M., & N. Islam, S. M. 2004. “Macroeconomic Analysis.” Economic growth and social welfare: operationalising normative social choice theory. Amsterdam: Elsevier. Gould, J. 1972. “Growth and Development in History.” Economic Growth in History: survey and analysis. London: Methuen and Co Ltd. Mukherjee, S. 2002. “Economic Growth and Development.” Isc Economics for Class XII. Mumbai: Allied Publishers Private Ltd. Victor, P. A. 2008. ”The idea of economic growth.” Managing without Growth: slower by design, not disaster. Cheltenham: Edward Elgar Publishing Limited. World Bank. 2013. “Indicators.” The World Bank. Retrieved on May 02, 2013: http://data.worldbank.org/indicator Read More