When Does Domestic Saving Matter for Economic Growth?

54 Pages Posted: 15 Jan 2009

See all articles by Philippe Aghion

Philippe Aghion

College de France and London School of Economics and Political Science, Fellow; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Diego A. Comin

Harvard Business School - Business, Government and the International Economy Unit

Peter Howitt

Brown University - Department of Economics; National Bureau of Economic Research (NBER)

Isabel Tecu

Charles River Associates (CRA)

Multiple version iconThere are 2 versions of this paper

Date Written: January 4, 2009

Abstract

Can a country grow faster by saving more? We address this question both theoretically and empirically. In our theoretical model, growth results from innovations that allow local sectors to catch up with frontier technology. In poor countries, catching up requires the cooperation of a foreign investor who is familiar with the frontier technology and a domestic entrepreneur who is familiar with local conditions. In such a country, domestic saving matters for innovation, and therefore growth, because it enables the local entrepreneur to put equity into this cooperative venture, which mitigates an agency problem that would otherwise deter the foreign investor from participating. In rich countries, domestic entrepreneurs are already familiar with frontier technology and therefore do not need to attract foreign investment to innovate, so domestic saving does not matter for growth. A cross-country regression shows that lagged savings is positively associated with productivity growth in poor countries but not in rich countries. The same result is found when the regression is run on data generated by a calibrated version of our theoretical model.

Keywords: Savings, growth, technology adoption, TFP, FDI

JEL Classification: E2, O2, O3

Suggested Citation

Aghion, Philippe and Comin, Diego A. and Howitt, Peter and Tecu, Isabel, When Does Domestic Saving Matter for Economic Growth? (January 4, 2009). Harvard Business School BGIE Unit Working Paper No. 09-080. Available at SSRN: https://ssrn.com/abstract=1328359 or http://dx.doi.org/10.2139/ssrn.1328359

Philippe Aghion

College de France and London School of Economics and Political Science, Fellow ( email )

London
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Diego A. Comin (Contact Author)

Harvard Business School - Business, Government and the International Economy Unit ( email )

Cambridge
United States

Peter Howitt

Brown University - Department of Economics ( email )

Box B
Providence, RI 02912
United States
401-863-2145 (Phone)
401-863-1970 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Isabel Tecu

Charles River Associates (CRA) ( email )

1201 F. St. NW
Ste. 700
Washington, DC 20004
United States

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