Service Expansion’s Impact On Economic Growth Rate

This paper discussed service sector expansion’s impact on economic growth under the context of technology diffusion from developed countries to developing countries. The aggregate growth is affected with the industrial structural transformation, especially the service sector’s expansion.as the growth of labor productivity in the service sector is lower than in the industrial sector, the service sector expansion might pull down economic growth rate, which is called the Baumol Disease. Compared to developed countries, Baumol Disease is particularly severe in developing countries as the relative value of the service sector of developing countries is far lower than developed countries (Balassa-Samuelson effect). The traditional explanations are that the service sector has lower labor quality and that competition in service sector is weak. Whether the service sector’s productivity is really lower than the second industry and whether service sector expansion really pulled down the economic growth rate remain controversial. However, considering technology diffusion, Baumol Disease can indirectly pull down the economic growth rate through this channel, and can be identified by its interaction with technology diffusion.Technology diffusion problem is actually a problem of economic convergence. In the traditional Solow model, the diminishing marginal product of capital means that the backward countries grow faster than the advanced countries. Endogenous growth model does not necessarily bring this convergence. However, taking technology diffusion into account, developing countries can still grow faster than advanced countries. If the structure transformation affects technology diffusion, it also affects growth rate of backward countries. Countries with higher initial level of technology diffusion are easily access to higher growth rates, but structural transformation changes the technology diffusion’s coefficient on the growth rate. So the higher the initial proportion of service, the lower the technology diffusion’s impact on economic growth, which means the interaction effect of technology diffusion and service sector is negative.This paper offers a two-sector technology diffusion model to describe the relationship of structural transformation, technology diffusion and aggregate growth, and discusses the different kinds of convergences with different elasticity of substitution through numerical simulation, thus clarifying the mechanism of structural transformation’s impact on economic growth through technology diffusion. The empirical analysis includes six measurements of technology diffusion. Using measurement error correction model it measures foreign R & D’s spillover effects on domestic service sector and industrial sector, showing that foreign R & D can contribute to the industrial sector’s output per worker through technology diffusion, but can’t promote the service sector’s output per worker. Then fixed effects model is built to study the initial degree of technology diffusion’s, the service sector’s and their interaction’s impacts on the average economic growth rate in the future. The results show that both the degree of technology diffusion and the service sector have a positive effect on the growth rate in the future. But the interaction has a negative effect. It proves that the service sector expansion itself does not pull down the economic growth, but it indirectly reduces the growth rate by reducing the effect of the technology diffusion. Considering the reverse causality between the level of trade (it is an important indicator to technology diffusion) and growth rate, the paper solves the endogeneity problem through instrumental variables method. Introducing the inside instrumental variable and the outside instrumental variable does not change the conclusions above. A Dynamic Panel Model does not change the conclusions either.Finally it gives Suggestions as follows:Even imitation cost remains low, convergence will not be achieved relying only on technology diffusion, as the service sector expansion indirectly reduces the growth rate by reducing the effect of the technology diffusion. Therefore, this paper supports the transition from imitation to innovation. In addition, the service sector’s capacity to accept technology diffusion is influenced by the adverse selection. The low quality of labor in service sector means it has not enough human capital to absorb high technology. Hence it is necessary to increase the level of openness and human capital in service sector to promote the healthy development of this sector, so as to promote the long-term stable growth.