# **Introduction**

Recent growth trends in OECD economies have renewed interest by policy makers and analysts on the sources of economic growth. Some countries, including the United States, have been able to revert the long-standing slowdown in multifactor productivity growth – the standard proxy for technological progress -- while others (mainly in Continental Europe) have persisted along a declining productivity growth path, or have even experienced a protracted stagnation in output growth (as in Japan). These striking differences in growth patterns have been related to the different ability of countries to innovate in the high-tech sector (e.g. information and communication technology, ICT) and to adopt new and highly-productive equipment. Can cross-country differences in innovation and adoption of high-tech be explained by greater returns to such activities in certain countries? And, are there appropriate business climate conditions that provide stronger incentives for firms to innovate and adopt new technologies? If this is indeed the case, is there a role for policy makers for improving business climate conditions? To date, the empirical evidence on these issues is scant.

Much of the recent growth literature has either used accounting techniques to decompose aggregate GDP and productivity growth into their main driving forces (see e.g. Jorgenson and Stiroh, 2001; Olinel and Sichel, 2001), or regression techniques to assess the long-run process of cross-country economic convergence (see e.g. Mankiw _et al._ , 1992; Barro and Sala-i-Martin, 1995). The latter strand of literature has also been extended to consider differences in technology growth rates across industries and countries (see e.g. Bernard and Jones, 1996 _a,b_ ; Harrigan, 1997 _a,b_ ). These studies largely concentrate on the “traditional” determinants of growth, _i.e._ the accumulation of reproducible factor inputs with the possible inclusion of human and knowledge capital. At the same time, however, sector and micro-level studies have pointed to the importance of market conditions for firms’ decision to innovate and adopt new technologies (Caves _et al._ , 1998; McKinsey Global Institute, 1997; Baily and Gerbach, 1995; Nickell, 1996; Blanchflower and Machin, 1996; Disney _et al._ , 2000). These studies offer important insights on the behavior of individual firms and specific markets, but because of their micro-oriented nature do not easily allow assessment of the importance of institutions and policy across countries.

This paper offers a contribution to the debate about the role of policy and institutions for productivity and output growth along two dimensions. First, we use harmonized two-digit industry-level data for a set of industrial economies to shed light on productivity convergence across countries and on the role of investment in human and knowledge capital. Our model allows for different patterns of cross-country convergence in multifactor productivity in different industries, while testing for the importance of human capital and R&D in fostering productivity, either directly or indirectly, _via_ the process of technology adoption. We also consider the possibility that the impact of technological catch-up, as well as of human capital and R&D, may differ depending on the underlying technology characteristics of each industry. Second, we assess the role of labor adjustment costs and bargaining regimes for productivity growth. In particular, we focus on hiring and firing costs that, by raising labor adjustment costs, may curb incentives to foster internal efficiency through the adoption of leading technologies and innovation (see e.g., Audretsch and Thurik, 2001; Hobjin and Jovanovic, 2