Determinants of Convergence in the Marginal Product of Capital

This paper examines the determinants of convergence in the marginal product of capital. We develop an empirical model from Solow’s growth model and augment it to include global factors of financial flows and capital embodied in commodity trade. Using data from 52 countries during the period from 1970 to 2005, we show that the marginal product of capital converges. However, this convergence is conditional upon country- specific variables such as reproducible capital share. Saving rates, foreign direct investment, and international trade are essential determinants of this conditional convergence. We find no evidence that debt financial flows reduce the global difference in the marginal product of capital. International trade also contributes to this convergence by equalizing international prices of investment and consumption goods.