Forecasting productivity growth resulting from international diffusion of ICT innovation - a dynamic CGE approach

Productivity growth is acknowledged as a critical factor for long term economic growth and development. Maintaining satisfactory productivity growth requires a constant supply of product and process innovations which in turn are an output of investment in research and development (R&D). R&D investment and resulting innovation, however, are not evenly distributed among countries - e.g. within APEC economies 85 percent of total R&D expenditure is shared between the USA and Japan, and 80 per cent of all applications for patents are shared between the USA, Japan and China. Innovation created in one country can, however, be transferred to other countries across national borders and thus enhance the productivity of economies which do not undertake significant R&D of their own. This paper models and forecasts the diffusion of Information and Communication Technology (ICT) innovation in the APEC region for 2007-2015. The study focuses on diffusion of new technology via international embodied spillovers, where innovative knowledge is embodied in the traded product. Forecasts are created along two scenarios: a baseline forecast and a policy/deviation forecast. The baseline is created by incorporating externally provided projections of key indicators, such as change in GDP, investment and labour force growth, into a dynamic CGE model thereby generating a disaggregated view (to the sectoral level) across the APEC economies for 2007-2015. Having identified the winners and the losers of the ICT diffusion process from the baseline forecast, in the policy/deviation forecast we examine how changes in variables that impact upon economies’ absorptive capacities may alter the predicted pattern of diffusion of ICT innovation.