The European Union at the knowledge frontier

This thesis investigates the way the European Union can become the most technologically advanced region. The first part of this thesis, consisting of the first two chapters, focuses on the emerging productivity gap between the European Union and the United States since 1995. The first chapter explains that three growth engines in the United States, namely retail trade, wholesale trade and financial services had been responsible for the entire new productivity gap. The second chapter describes how growth in these three growth engines came about and explains the unsustainable character. The present financial and economic crisis was triggered by an over-indebted U.S. consumer and this chapter shows how this consumer has already entered a reversing path towards saving and investing. Therefore, the retail trade, wholesale trade and the financial services sectors will shrink in size since they mainly depend on consumer spending. This chapter is an addition to the existing literature about the productivity gap between the United States and the European Union since 1995 in the sense it explains that this gap has just been a phase. The second part of this thesis, consisting of the last two chapters, describes the way the European Union can move the technological frontier. The third chapter gives a theoretical overview of knowledge as the most important determinant for economic and productivity growth in advanced nations. The last chapter analyzes the role of knowledge as measured by the shares of elementary and tertiary education, the shares of employment in high-tech. manufacturing and knowledge intensive services, and patents as a percentage of the labor force for GDP growth. The main multiple linear regression that includes all regions of the 15 member states of the European Union finds significant and positive effects of the share of tertiary educated people and the share of employment in high-tech. manufacturing on GDP. However, the two regressions that distinguish between northern and southern regions based on their geographical dispersion provide two supplementary findings for the existing literature. The first finding is related to the role of elementary education for economic growth in advanced regions. The regression with northern regions reports significant and positive effects of the shares of elementary and tertiary educated people (with standardized coefficients of 0.375 and 0.330, respectively) and the share of employment in high-tech. manufacturing (with a standardized coefficient of 0.373) on GDP. Other studies about the role of education as determinant for innovation only take tertiary education into account, while this analysis also finds that elementary education fulfills an important role in advanced regions. The second finding is that northern and southern regions differ significantly in terms of the effects of the knowledge related independent variables on GDP. The regression with southern regions is insignificant, which means that knowledge, as captured by the five independent variables, is not an important determinant for GDP. Therefore, not the entire European Union, but the northern member states can be innovative and move the world technological frontier.