interpretation with respect to intermediate inputs, while under the quality ladder interpretation 0 < b < 1, with b → 1 associated with “high,” and b → 0 denoting “small” quality differentials.

• The usual proxy for the <u>NN</u><sup>termunderbothSchumpeterianapproachesisgivenbytheratioof</sup> the flow of R&D to the market value of the stock of past R&D. While the flow measure is generally readily available, the stock measure is not. Fortunately, from the relationship given by equation (7) it can be readily demonstrated that TFP growth is linear in the ratio of the R&D flow measure to per capita output, easing the requirements of empirical specification.<sup>14</sup> A remaining problem with the empirical specification is that a danger of simultaneity bias continues to lurk in the above specifications. Where R&D proves successful in stimulating TFP growth, firms have an incentive to respond by raising R&D expenditure further. There is thus no reason to suppose that R&D activity would not respond to changes in productivity growth. In order to obtain reliable estimation results it is thus important to instrument the R&D measure. The most generic instruments relate to government policies toward R&D, the registration of patents, and other variables relating to the general enabling environment for private sector R&D activity (most of R&D in South Africa is private sector based).

R&D has found empirical support as a determinant of productivity growth.<sup>15</sup> Of course, innovation is unlikely to be determined by a single dimension such as R&D activity, however that is conceived. The empirical and theoretical literature has identified a range of other relevant conditioning variables,<sup>16</sup> including industrial bargaining characteristics,<sup>17</sup> product market characteristics (essentially industry concentration),<sup>18</sup> labor quality and human capital,<sup>19</sup> trade, international competition or openness of the economy,<sup>20</sup> foreign direct investment,<sup>21</sup> financial liberalization, and exchange rate overvaluation.<sup>22</sup> Here we consider the possibility that infrastructure may similarly affect growth in TFP.<sup>23</sup> We proceed with an application to South African data.

# 4 The Data and the Econometric Methodology Employed

## 4.1 The Data

The empirical work of this paper employs aggregate data for South Africa, manufacturing sector data for South Africa, as well as data from a panel of countries on which infrastructure data is available. Choice of the manufacturing data is determined by data reliability.

In the empirical section employing the manufacturing sector data, we employ a panel data set for purposes of estimation, with observations from 1970 through 1997. The panel employs data for

> 14 Thus we can replace Market V alueR&D <u>F lowof</u> P ast R&D<sup>with</sup><sup><u>R&D</u></sup> Y/L<sup><u>F low</u></sup> .

> 15 See for instance Lichtenberg and Siegel (1991), and Hall and Mairesse (1995).

> 16 In addition to the conditioning variables specified, the literature has also identified the regulatory environment as relevant. See, for instance, the discussion in Pakes and McGuire (1994), Hopenhayn and Rogerson (1993) and Olley and Pakes (1996). Since we have data only on financial liberalization for South Africa, we do not pursue this line of enquiry further in this paper.

> 17 See for instance Nickell (1996), Freeman and Medoff (1981).

> 18 See Nickell (1996), Haskel (1991) and Haskel and Slaughter (2001), Baily, Hulten and Campbell (1992), Lichtenberg (1992), McGuckin and Sang (1995), and Jovanovic (1982).

> 19 See, for example, the findings in Doms, Dunne and Troske (1997), and Entorff and Kramarz (1998). In a somewhat different tradition, see Nelson and Wright (1992) and Fagerberg (1994).

> 20 See Grossman and Helpman (1991), Rivera-Batiz and Romer (1991), Coe and Helpman (1995), Coe, Helpman and Hoffmaister (1997), Keller (1998), Benhabib and Spiegel (1994), Haskel and Slaughter (2001), Mayer (2001), Sala-i-Martin et al (2004), Bosworth and Collins (2003), Sachs and Warner (1995). See also the discussion in Tybout (2000) with respect to developing country manufacturing sectors, and Bernard and Jensen (1995), Clerides, Lach and Tybout (1998), Doms and Jensen (1998), and Bernard and Jensen (1999).

> 21 See De Mello (1997) and Ramirez (2000a), and Fedderke and Romm (2005) for an application to South Africa.

> 22 See Rajan and Subramanian (2005).

> 23 An earlier paper employs a symmetrical methodology to investigate a wide range of other impacts on TFP growth - see Fedderke (2005).

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