Diffusion

Abstract

Diffusion of physical and human capital has played a key role in modern economic growth. Diffusion has three interrelated features. One is the interdependence and linkage of firms, industries, and sectors. The second is the spillover effect and spread of any growth impulse. The third is the cluster effect and agglomeration phenomena by which firms adopt innovating practices. All the three aspects of diffusion stimulate economic growth through productivity increase, market expansion through international trade and knowledge diffusion. According to Helpman (2004), productivity growth of physical and human capital accounts for more than half the variation in growth rates across income per capita countries. Market expansion through trade provides an important mechanism for the international transmission of growth effects. The successful NICs in Southeast Asia provide an important example of this transmission effect. The high growth rates achieved by these countries in the last three decades were largely due to cumulative export growth and dynamic learning by doing methods that generated significant scale economies. Knowledge diffusion occurs through organization learning, exchange of R&D information, and foreign direct investment. Technology transfer by multinational companies (MNCs) has played a key role in the international diffusion of technical knowledge. Joint ventures and cooperation in R&D activities are also important in this connection.