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Abstract
In this paper, we assess the role of investment in research and development (R&D) and economic policy uncertainty (EPU) in Sri Lanka’s economic growth experience. We do this by first determining which endogenous growth theories best explain the evolution of total factor productivity (TFP) in the country. Using historical time series data (1980–2018), we find that semi-endogenous growth theories best explain the evolution of TFP in Sri Lanka. This evidence suggests that R&D is critical to the country’s TFP expansion. We find that, through R&D, EPU has a crucial detrimental impact on TFP growth, although it is short-lived. Our findings are robust and have important implications for R&D investment and for moderating EPU.
Highlights
Recent events, such as the US–China trade tensions (2018-date),1 the recent US presidential election, the prolonged Brexit tensions (2016-date),2 the persistent political instability in the Middle East, the social unrest in Hong Kong (2019–2020),3 the influx of refugees in Europe, the 2020 Russia–Saudi Arabia oil price war,4 among others, have heightened global policy uncertainty, which studies argue harms investment and economic growth
Alessandria et al (2015) demonstrate that uncertainty shocks can induce the international reallocation of production. He et al (2020) find that low economic policy uncertainty (EPU) is positively associated with corporate innovation. Our study addresses these limitations of the literature by showing that semi-endogenous growth theories best explain the growth experience of Sri Lanka, such that research and development (R&D) investment is a fundamental driver of technological growth and should be intensified for sustained economic growth
The Perron test fails to reject the null hypothesis of no unit root for lnA. This finding is supported by the NP test results, which means that total factor productivity (TFP) is nonstationary, consistent with semi-endogenous growth theory
Summary
Recent events, such as the US–China trade tensions (2018-date), the recent US presidential election (in 2020), the prolonged Brexit tensions (2016-date), the persistent political instability in the Middle East, the social unrest in Hong Kong (2019–2020), the influx of refugees in Europe, the 2020 Russia–Saudi Arabia oil price war, among others, have heightened global policy uncertainty, which studies argue harms investment and economic growth (see e.g. Jens 2017; Ahir et al 2018; Phan et al 2021). The EPU component of Sri Lanka’s extreme overall uncertainty could be attributed to excessive state budget deficits, drastic regime shifts, high and volatile lending rates, and balance of payments cycles.. The EPU component of Sri Lanka’s extreme overall uncertainty could be attributed to excessive state budget deficits, drastic regime shifts, high and volatile lending rates, and balance of payments cycles.5 These episodes of extreme uncertainty, which have led to a persistently weak business environment, have distorted all forms of investment, trade, and the functioning of the country’s financial market and, the country’s TFP growth. Endogenous theories allow us to enrich our empirical exploration with R&D investment and EPU, while establishing the sources of total factor productivity (TFP) growth in Sri Lanka
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