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Realizing Globalization’s Innovative Potential

The diffusion of knowledge and technology worldwide in recent decades has brought important changes to the global innovation landscape. But those changes could be much more profound if countries created more supportive investment environments.

WASHINGTON, DC – Globalization has come under fire in recent years, with people in some countries becoming increasingly frustrated with the uneven distribution of its gains. But weaknesses in management or execution should not be allowed to obscure globalization’s far-reaching potential benefits, including its promotion of productivity-enhancing technology transfer and innovation worldwide.

As the April 2018 issue of the International Monetary Fund’s World Economic Outlook points out, globalization – encompassing freer trade, increased foreign direct investment, and the international use of patents and copyrights – has substantially bolstered the diffusion of knowledge and technology. The increased international competition associated with globalization may also contribute to overall prosperity, as it strengthens incentives to adopt new technologies and to innovate.

By bolstering productivity, all of this can boost average output at a relatively low cost. The WEO estimates that in emerging-market economies, foreign knowledge accounted for about 0.7 percentage points of annual growth in labor productivity from 2004 to 2014, and a total of 40% of observed sectoral productivity growth. In 1995-2003, that rate was just 0.4 percentage points. These results remain robust even when China is excluded, indicating that the productivity effects associated with globalization were broad-based.

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