Working paper No. 77
Gavin Cameron, James Proudman and Stephen Redding
There is a strong partial correlation between openness and rates of productivity growth across UK manufacturing sectors. This paper investigates the relationship more formally, within a theoretical model of productivity catch-up. The model identifies three potential e ects of international openness: openness may affect (a) domestic rates of innovation, (b) the quantity of technological know-how that may be transferred from the frontier to the less advanced economy, (c) the rate at which this technology transfer occurs. From the theoretical framework, we derive an econometric equation which is used to estimate the relationship between UK productivity growth, the UK-US productivity gap and the degree of international openness. We find that international openness primarily affects the rate of productivity convergence, and that this relationship is robust to the inclusion of information on R&D intensity, human capital, unionisation and capacity utilisation.