Economic Growth and Technological Progress in Turkey: An Analysis of Schumpeterian Mechanisms

Abstract

This paper studies a second-generation Schumpeterian model to understand the nature of
technological progress and economic growth in Turkey. It identifies some structural parameters
numerically and tests whether certain Schumpeterian mechanisms work. Results show that both
horizontal (product) and vertical (process) innovation channels operate as determined in theory.
However, the pace at which vertical (process) innovation occurs is extremely low, implying that
its contribution to long-run productivity growth is severely limited. Since the paper directly
estimates the structural forms originating from the general equilibrium of the model economy,
results do not carry any endogeneity bias. That the technological landscape very slowly expands
in its vertical dimension explains why the Turkish economy did not converge to frontier
economies. Since whether a firm should engage in vertical (process) innovation crucially
depends on its size in theory, the most appropriate policy under resource constraints may be to
strengthen the incumbent firms and support their growth. Put differently, the formation of new
enterprises in the horizontal dimension may not be a policy priority.

Full text

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Economic Growth and Technological Progress in Turkey:
An Analysis of Schumpeterian Mechanisms



METU Studies in Development
Abstract
           







             
           



Keywords:
JEL Classification Codes:
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M. Aykut Attar






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1. Introduction


               
the endogenous growth theory     
       how  why  

1







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             
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         
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plane  
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      robust       
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            
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


           knowledge production
function            


              an error of
aggregation not specification          

           

           
            

      

 the Manhattan Metaphor 
The
first task             





The second task
             




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           
             
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              
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             
         
          
    
            

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         






2





 


2
 




2. Economic Growth and Productivity in Turkey: A Very Short Review


 


            



Table 1
Postwar Growth Rates in Selected Economies (% per annum)
1950-59
1960-69
1970-79
1980-89
















































1990-99
2000-09
2010-14
1950-2014


















































Notes        
            




           



    
           -accounting
exercise for the period of 1880-2005 and conclude that physical capital accumulation is more
important than TFP growth especially before 1980s.     

 a detailed review.

  
 For the period of 1960-2004,       
           
Building a two-sector model to study the role of agricultura
(2014) provide growth-accounting results showing that TFP growth is significant especially in

analysis of 2004-2012 data show that (i) broadly-defined labor productivity is important in
explaining economic growth before the Global Financial Crisis but (ii) the post-crisis episode
is characterized by the dominant role of the ratio of employment to the working age population.

          

           

3





3. The Model

   

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



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  




Figure 1: The Technology Landscape as a Subset in 
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
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
  




              


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 
        
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 
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
              


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 
              

          
            







not
 

          






 

 
      


 


              






           


5

         
           


             

6
arbitrage

              

   
 



 
    
 
love-of-variety
 
         




 
 
 
7
          
5
    

6

      


7

  




8


 
              
 


 


  
  

       

9



    

10

               


           


                 

8
  


9



10












 


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             



 
 

          






 






 




 




 

11
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            






               




  







 
 
      no vertical innovation activity  



  

          





11







 

 
singularity restriction





    

4. Data and the Estimation Results



Table 2
The Flow Numbers of Firm Entry and Exit in Turkey
Newly Established
Liquidated
1965
1950
1020
1970
3860
1094
1975
5303
772
1980
7527
182
1985
13917
981
1990
18699
644
1995
56046
595
2000
33161
1887
2005
47401
8886
2010
51971
13442
2011
54442
14991
2012
39764
16063
2013
49943
17400
2014
58715
15822
2015
67622
13701
2016
64481
12328
Notes: The data source is TurkStat (2012) for 1965-2010 and TOBB
(2017) for 2011-2016.
              
           



The Union of Chambers and Commodity Exchanges of Turkey






  
                 



            


Figure 2: Alternative Constructions for the Total Number of Firms




        



rtfpnarwtfpnain time

12
rwtfpna


rtfpna
13





         

14







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    


             



               



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
 
 

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


          




  

15

Table 3
The Nonlinear (Logistic) Fit for 
NLS
Estimates
t values
Default
N-W
Robust





















Notest
  

Figure 3: Actual versus Fitted Values for the Number of Firms per capita
15

 



Table 4

             





          
 



16








16
 
 
 

 
Some Diagnostic Tests on the Logistic Fit for 
normality
p value
stationarity
null hyp.
test stat.
lag
























Notes

  
      

            




Table 5
The Nonlinear Fit for 
NLS
Estimates
t values
Default
N-W
Robust


























Notest
 

              











 
           





               

          
      
              



Figure 4: Actual versus Fitted Values for Aggregate TFP
Table 6
5. Discussion and Concluding Remarks
 do we know about the long-run patterns of economic growth in Turkey? What are the
mechanisms that at least partially determine how economic growth occurs? Which engines do
Some Diagnostic Tests on the Nonlinear for 
normality
p value
stationarity
null hyp.
test stat.
lag
























Notes
                



             
   



operate and increase aggregate TFP? Why are some other growth engines not working for the
Turkish economy?
This paper offers new and concrete answers to these questions. The analysis takes the
Schumpeterian paradigm seriously and utilizes Peretto and Connollys (2007) second-
generation model. This model has sound microeconomic foundations and robust theoretical
properties. It also attains a closed-form solution for its unique general equilibrium, and key
endogenous variables of the model have reduced-form representations that allow us to estimate
some of the structural parameters in a rigorous manner.
The nonlinear regressions estimated test for horizontal and vertical dimensions of innovation
using time-series data. The nonlinear regression estimates of the closed-form solutions indicate
that, in Turkey, both dimensions of innovation, i.e., horizontal and vertical, are active. In other
words, the two-dimensional technology landscape of the economy expands in both directions
in Turkey.
That both types of innovative activity are statistically significant sources of technological

sectors; large fractions of firms from industry and services sectors report themselves as
innovators (TurkStat, 2017). The latest data for 2012-2014 indicate that 51.3% of firms are
innovative enterprises. When the firm size measured by the number of employees is considered,
larger firms are more innovative for all types of innovations as expected. Regarding the type of
innovation, 22.7% and 26.8% of all the respondent firms are respectively product and process
innovators. Besides, these figures do not exhibit much variation in time with similar fractions
being tabulated for 2010-2012, 2008-2010, and 2008-2006 waves of the survey.
Tha           




17




17


  





This paper contributes to the literature focusing on the empirical applications of Schumpeterian
models as discussed in the Introduction. Three noteworthy aspects other than this are the
following: First, results do not carry any endogeneity bias; directly estimating the reduced-form
solutions identifies the structural parameters. Second, results advance our understanding of how
the Turkish economy really evolves and exactly why it does not grow in a really fast manner in
the very long run. Third, results in principle lead the way to the formation of appropriate
industrial and technological policies. 

policy options (Ferragina et al., 2014), one macro policy message is immediate here: Since the
profitable operation of the vertical innovation necessitates a sufficiently large firm size in the
second-generation Schumpeterian models (Peretto, 2016) and since surviving firms have
considerably larger sizes in Turkey (Pamukcu et al., 2010), it is quite clear that the creation of
firms, i.e., entry, is of secondary importance for a fixed policy budget. Efforts, instead, should
be exerted to let the incumbent firms grow before they are forced to leave the market for some
reason such as credit constraints or economic crises. This policy message is largely consistent
with the one offered by  on the appropriateness of in-house R&D
subsidies in Turkey. Since these authors arrive at this conclusion using micro-data for Turkish
manufacturing firms, the present paper that utilizes macro-data for Turkey and reaches a similar
conclusion is highly complementary.
18
Much remains to be done to complete a satisfactory analysis of economic growth and
development in Turkey. The literature has so far been illuminating in accounting for the
proximate sources of growth and some of the likely reasons behind the relatively poor growth
performance of the Turkish economy. But answers to challenging questions in economics can
usually be iterated toward more challenging questions. If business firms in Turkey do not
generally have a large enough firm size to profitably invest sufficiently large amounts in process
innovations, why is this the case? Exactly for which reason do these firms not expand in size
even though the number of firms keeps increasing in the extensive margin of entry? The demand
and supply mechanisms determining the equilibrium size of firms enter this picture in quite
transparent ways in theory, but identifying the structural mechanisms is not always feasible
given the limited availability and quality of micro data. And even if one can ever decipher the
demand- or supply-side factor x that is explanatory here, there would still be another iteration:
Is it the lack of good policy or too much of regulation and bureaucracy causing factor x? Is it
more fundamentally about how economic and political institutions emerge and evolve? What
about the role of culture in affecting all of these? These are questions that would consume a
18
                 


               
         
             



decade of research if not a lifetime of it, and the field is wide open for future work quite
specifically guided by truly Schumpeterian notions.
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Review of Economics
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Central Bank Review

İktisat İşletme ve Finans,
Growth and Demography in Turkey: Economic History vs. Pro-Natalist
Rhetoric

unpublished manuscript
  
Economic Modelling,

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, R. B., BELANGER, A. J. and  .,    
American Statistician,
44 (4), 316-321.
DINOPOULOS, E. and THOMPSON, P. (1    
Journal of Economic Growth, 3 (4), 313-335.

   American Economic Review,    

FERRAGINA, A. M., TAYMAZ, E. and YILMAZ,      
Innovation, Globalization and Firm Dynamics: Lessons
for Enterprise Policy, Eds. A. M. FERRAGINA, E. TAYMAZ, and K. YILMAZ, New
York: Routledge, pp. 357-365.
FERREIRA, P. C. and TREJOS, A. (2011Gains from Trade and Measured Total Factor
Productivity Review of Economic Dynamics, 14 (3), 496-510.

Review of Economic Studies

Economic Theory
        
Macroeconomic Dynamics,
           
Emerging Markets Finance
and Trade,
             
    Journal of Money, Credit
and Banking
Quarterly Journal
of Economics
        Journal of Political
Economy
Econometrica


 Journal of Economic Growth
           Journal of

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Monetary Economics
    
       Journal of Economic
Growth

Journal of Economic Growth

           
Labor Economics
      Does innovativeness matter for international

Research Policy, 33 (3), 409-424.
(R&D support programs in developing countries: The
Research Policy, 37 (2), 258-275.
(2010),
    Market Dynamics and Productivity in Developing
Countries. Economic Reforms in the Middle East and North Africa,

         Journal of
Economic Growth
PERETTO
Journal of Economic Growth,
, P. F. unpublished manuscript
           

         Journal of Political
Economy
 Journal of Political Economy

ROYSTON Stata
Technical Bulletin, 3, 23-24.
        Türkiye Ekonomisinde Sermaye
Birikimi, Verimlilik ve Büyüme: 1972-2003
Türkiye Ekonomisinin Büyüme Dinamikleri: 1987-2007
Döneminde Büyümenin Kaynakları, Temel Sorunlar ve Potansiyel Büyüme Oranı

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
The Theory of Economic Development: An Inquiry into Profits,
Capital, Credit, Interest, and the Business Cycle    

            Quarterly
Journal of Economics
  Economic Record, 

           
İktisat Üzerine Yazılar II, İktisadi Kalkınma, Kriz ve İstikrar, Oktar
Türel’e Armağan,           
-
Ulusal Yenilik Sistemi: Türkiye İmalat Sanayiinde Teknolojik Değişim ve
Yenilik Süreçleri

 Eurasian Business Review 
     

       


Statistical Indicators 1923-2011 Publication No.3890


          
Comparative Economic Studies,

Ekonomi-tek,
          
Economics Letters

Ekonomi-tek
 
         METU Studies in
Development,

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           
 Industrial Dynamics,
Innovation Policy, and Economic Growth through Technological Advancements,
          

          
İktisat, İşletme ve Finans
Journal of Political Economy
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