Technological progress, non-price factors competitiveness, and changes in trade income elasticities: empirical evidence from South Korea and Hong Kong

In the Balance of Payments Constrained Growth model literature, income elasticities (IE) are considered as the crucial element determining a country’s long run growth rate. Although the extant literature accepts that technology matters for the IE magnitude, explanations linking technology and the IE magnitude are limited. In this paper, we make use of the National Innovation System (NIS) concept from the Evolutionary School to explain the channels through which the size of a country’s IE is influenced by the level of development of its NIS, which in turn, is a channel through which the non-price competitiveness factors work. Additionally, we empirically test the hypothesis that the catch-up allowed by NIS developments achieved in South Korea and Hong Kong improved their IE over the 1980-95 period. Our empirical results suggest a link between the level of NIS development and the size of the IE.