Innovation Policy & Labour Productivity Growth Education, Research & Development, Government Effectiveness and Business Policy

This paper examines the relationship between labour productivity growth in non- traditional sectors and―innovation policy‖ for a cross-section of countries. Innovation policy is characterized by investments intertiary education and research and development as a percentage of Gross Domestic Product (GDP), thefreedom in the business environment, as well as overall government effectiveness. Our results confirm theeconomic convergence between richer and poorer countries. We could show a significant positive effect of theinteraction between government effectiveness and government expenditures in tertiary education as a percentof GDP on labour productivity growth in non-traditional sectors. Also, for developing countries, a positive andsignificant relationship between the growth variable and effective research and development expenditures wasobserved. We could not uncover a relationship between other innovation policies and labour productivitygrowth. Non-traditional sector labour productivity growth in the oil rich Arabian Gulf countries was observedto be consistently slower than western countries. Higher oil prices appear to crowd-out innovation in oil-richcountries while stimulating innovation in oil importing countries.

Innovation Policy & Labour Productivity Growth Education, Research & Development, Government Effectiveness and Business Policy Keywords:

Innovation policy , labour productivity growth , technological change , government effectiveness , developing countries , Arabian Gulf countries