Does Manufacturing still matter? Hi-tech manufacturing sector and economic growth in 26 advanced income countries
Authors:   Asia-Europe Perspective Association, Suh Hanseok 
Published: December 2024

Historically manufacturing sector had played a key role in economic development, but data shows that manufacturing value added and manufacturing employment share has continuously declined as per capita GDP increases. This downward trend is starking especially in high-income economies. The scepticism about the effectiveness of manufacturing to foster development see this declining process as the natural consequence of the industrial dynamism because productivity increases are exceeding increases in demand for manufactured products by a significant amount. Is manufacturing still the engine of economic growth? More recent studies have analyzed the role of manufacturing sector for economic growth using panel data for an wide range of countries, which generally concluded that the manufacturing sector may have played an important role for economic development, especially for catch-up strategies used by developing countries. Manufacturing enthusiasts argue that high-tech manufacturing industry(=HTMI) is essential to the longer term health of the economy on the ground that: Without a manufacturing sector it will become very difficult to sustain innovation; Manufacturing is a key driver of physical investment; Around 80% of trade among regions is manufacturing trade.
To investigate whether the manufacturing sector, especially HTMI is still the engine of growth or not, we propose set of hypotheses; Increasing share of HTMI through a three channels of physical investment, R&D expenditure, and export will boost economic growth; (2) Increasing share of HTMI through the complementary relationship between knowledge-intensive service sector will increase economic growth. To examine the empirical relationship between changing share of HTMI and economic growth, we introduce econometric methodology of 3SLS(3-Stage Least Square Estimation) based on Tavares and Wacziarg (2001)’s structural equation system. We allows for the estimation of a simultaneous equations regression model in which an independent variable affects the dependent variable through different channels. Channel variables and economic growth are estimated simultaneously by 3SLS estimation. The joint estimation method for a simultaneous system of equations has the advantages of ensuring the endogeneity and the more flexible assumption on stochastic disturbance terms. While previous work has concluded that increasing share of manufacturing is an important determinant of growth, the various channels of influence have not been disentangled in order to provide an explanation of the result. We employ a fully-specified empirical model to evaluate the channels through which HTMI might affect economic growth. Moving away from single-equation estimates, our results based on a simultaneous-equation system capture the different channels.
Empirical results show that: (1) The coefficients for the share of HTMI taken from the three different channel equations in the system provide statistically significant evidence that HTMI has incremental effects on physical capital investment, R&D expenditure, and export; (2) Estimated coefficients of three channel variables on economic growth have all significant and positive value i.e., higher level of physical investment, R&D expenditure, and export result in higher level of economic growth; (3) The product of the coefficient of HTMI in the channel equation by the coefficients of the variables in the growth equation illustrates how HTMI affects growth indirectly through these channels.