The Composition of Knowledge and Economic Growth In A Path-Dependent World

A country's composition of knowledge affects its future growth, as technologies differ greatly in their scope of applications. In the presence of intersectoral knowledge linkages, trade or institutional barriers generate asymmetric effects on the R&D investment across sectors, hence the country's technology composition. In particular, countries far away from its trading partners or with higher regulation costs or lower level of rule of law tend to concentrate less in sectors with high knowledge spillovers, and consequently grow less. We demonstrate these propositions formally in a multi-sector model of endogenous growth, and present empirical support for them. Using cross-sector U.S. patent citations, we construct a sector-specific measure of knowledge applicability, and show that the applicability of a country's technology portfolio indeed predicts its subsequent growth.