Innovation and labour productivity growth moderated by structural change: Analysis in a global perspective

The relationship between innovation and productivity growth has received a lot of attention in recent decades. Many countries are facing economic structural changes in the form of resource allocation changing from traditional to technologically advanced sectors, which directly affects sectoral share and productivity. Resource allocation that is considered structural change also takes place through innovation activities. This paper attempts to explain the impact of innovation on productivity, which is moderated by structural change. Ignoring such a moderation effect may cause over- or underestimation of the true effect. Using a global sample from 1996 to 2013 for a panel of 65-87 countries with treatments for endogeneity (2SLS and system GMM), we find a positive significant effect of innovation on both structural change weighted productivity and unweighted average productivity, and that the effect on structural change weighted productivity is larger. We also find this effect to differ in economies experiencing different structural transition phases and income levels. Our results are robust across alternative measures of structural change, such as diversity measure and natural resource share in GDP.