Technological Forecasting & Social Change 159 (2020) 120194

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Technological Forecasting & Social Change

journal homepage: www.elsevier.com/locate/techfore

Can economic structural change and transition explain cross-country T

differences in innovative activity?
Cong Wanga,⁎, Yifan Lub
a
Department of Economics, Macquarie University, 4 Eastern Road, North Ryde, NSW, 2109, Australia
b
Tasmanian School of Business and Economics, University of Tasmania, Hobart, TAS, 7005, Australia

ARTICLE INFO ABSTRACT

Keywords: Motivated by the combination of Schumpeter's view on innovation and the Kuznets’ retardation theory con-
Cross-country study cerning structural change introduced by Quatraro (2009), this paper attempts to explain the impact of structural
Innovation change on innovation. Using a global sample from 1970 to 2012 for a panel of 75 developed and developing
Structural changes countries with treatments for endogeneity by using physical instruments (2SLS) and the system GMM estimation
Human capital
technique, we find a positive significant effect of service sector share and a significant negative impact of the
Financial development
agriculture sector share on innovation. We also find these effects to differ in different economies characterized
by income and structural transition phases. In particular, shifting away from the agriculture sector is found to be
JEL Codes:
C31 important for more advanced economies, while the industry sector is important for innovation among upper
D24 middle income economies. The low income economies generally benefit much less from their structural change
O49 efforts than lower middle, upper middle and high income economies do.

Introduction
The majority of advanced and developing economies have experi-
enced notable changes in their economic activity for the past few
decades. A large body of literature (see e.g., Freeman and Soete, 1997)
has provided empirical evidence of a gradual move towards the
knowledge-based economy. On the one hand, since World War II, a
growing number of industralized countries have experienced the tran-
sition from a manufacturing dominated economy to a knowledge based
one. On the other hand, in recent decades, the deindustralization in
some parts of the western world has contributed to the rise of the
emerging economies such as China. These phenonmenon has stimulated
research that combines the analysis of structural change with the eco-
nomics of technological change and innovation, and subsequently
contributed to the renewed interests in the study of economic structural
change.
Structural change is very important for the knowledge-based
economy. In particular, the increasing importance of the service sector
is responsible for at least the increased productivity growth in the new
economy (see e.g. Broersma and van Ark, 2007; Griliches, 1994;
Jorgenson and Timmer, 2011). However, current empirical contribu-
tions have largely ignored the role of this change in economic structure
that is needed to adapt to changes induced by technological progress.
To the best of our knowledge, the only known empirical study on this
matter (Quatraro, 2009) focuses on 20 Italian regions and three sectors
(manufacturing, trade and finance) that are relevant for the Italian
economy. More empirical evidence on the relationship between struc-
tural change and innovation is certainly very much needed. For this
reason, this paper aims to investigate the shift towards the knowledge
based economy among the advanced economies and the shift towards
manufacturing based industries in the developing world by looking at
the relationships between structural change and innovation in a global
context.
Similar to Quatraro (2009), we follow a Schumpeterian view on the
innovation process. According to this view, economic agents innovate
because of unexpected changes in the economy (Schumpeter, 1947).
Innovation occurs when the economy reaches its full potential. Unless
the profitability declines, this behavior spreads across the system
(Schumpeter, 1939). We then follow Quatraro (2009) to combine this
Scumpeterian view of innovation with Kuznets (1930)’s retardation
theory, which according to Quatraro (2009), “allows for the qualifica-
tion of innovative behavior in the light of the endless process of
structural change which characterizes modern economic growth”
(Quatraro, 2009). When employment shifts toward new sectors, in-
novative activity shifts toward such sectors as well. As long as the re-
tardation process for certain industries is not complete, such industries
can still exihibit high level of innovative activitiy, whereas for those
“outdated” industries whose retardation process is complete, innovative

⁎
Corresponding author.
E-mail addresses: cong.wang@mq.edu.au (C. Wang), yifan.lu@utas.edu.au (Y. Lu).

https://doi.org/10.1016/j.techfore.2020.120194
Received 2 November 2019; Received in revised form 26 June 2020; Accepted 1 July 2020
Available online 15 July 2020
0040-1625/ © 2020 Elsevier Inc. All rights reserved.
C. Wang and Y. Lu
activity is gone.
The contribution of this paper is therefore three folds: (1) it provides
an attempt to integrate two highly complementary types of analysis into
a single analytical framework, which are largely looked at in separate
literature, namely the Kuznet's retardation theory and Schumpeter's
thory of innovation in a global context. (2) It provides empirical evi-
dence on the relationship between structural change and innovation in
a global context for 75 developing and developed countries from 1970
to 2012 and identify structural change through the shift between three
main economic sectors (agriculture, industry and service) which cover a
country's most economic activity. (3) In our analysis, we use etimation
techinque that addresses the endogeneity of structural change, as
clearly according to the above theories, structural change and innova-
tion can influence one another in both causal directions. To the best of
our knowledge, this hasn't been done in the current literature.
The remainder of this paper is structured as follows. Section 2 re-
views the literaure on both the theorectical foundation and empirical
evidence of the relationship between structural change and innovation.
Section 3 introduces the data and methodology including identificaiton
strategy. Section 4 provides core results and robustness checks. Section
5 concludes.
Theoretical foundation and literature
Structural change and global economic growth
Economic development entails structural change is a central insight
in development economics. Empirical and theoretical argument on this
issue can be dated back to decades ago (see e.g., Kuznets, 1930;
Burns, 1934; Kuznets, 1966). In most recent studies, Coccia (2018,
2019a) suggests structural change from traditional agriculture to in-
dustrial and service system can explain long-run economic growth due
to increases in human capital “quantity and quality (population growth
and education), increases in capital (through saving and investment),
and improvements in technology” (Coccia, 2018). Specifically, constant
shifting of labor, capital, and input resources between enterprises,
sectors and nations is the driving force of economic development,
which is caused by changes in domestic demand and international trade
patterns (Chenery et al., 1986; Harberger, 1998).
Many previous studies investigate the experience of different
economies and state one of the patterns of changes in economic struc-
ture to increase productivity is the transfer of labor and capital from
primary product production to manufacturing and later to service sec-
tors (see e.g., Temple, 2001; Jorgenson, 1995; De Vries et al., 2012).
This trait is particularly typical of post-World War II growth experience
in Europe, Japan, and the United States (Maddison, 1987; Baumol et al.,
2007). For low-income countries (in Latin America and Africa), the
promoting effect of structural change on productivity development is
still debatable (see e.g., McMillan et al., 2014; Szirmai, 2012).
Gollin et al. (2011) state that agricultural labor productivity levels and
growth rates in low-income countries are lower than in other economic
sectors, reflecting the nature of production functions, investment op-
portunities, and techniqual change. A recent study by Bosworth and
Collins (2008) contrasts the development experience of China and India
since 1980s and found that structural change (mainly industrialization)
is an engine of GDP per capita growth of these two populus Asian
countries (also see Timmer and Szirmai, 2000). This cross-country
difference may be related to the trend of deindustrialization in recent
decades: advanced economies have shifted manufacturing to Asian
countries in exchange for lower cost, which causes the hump-shaped
relationship between industrialization and income to move downward
(Rodrik, 2016). The above literature shows that the effect of structural
change on economic growth may vary according to the level of
2
Technological Forecasting & Social Change 159 (2020) 120194
development of different economies, thus we believe the issue of
structural change should be analyzed from a scope of comparative
studies.
Technological change and innovative activities
Technological progress is produced to support the economic growth
and structural change of nation. Specifically, according to endogenous
growth theory, economic policies of countries which encourage in-
vesting in higher education sectors as well as R&D activities in en-
terprises and public research organizations can increase innovation
outputs, productivity, economic growth (Coccia, 2011, 2012,
M. 2019b) In addition, scientific progress and the generation of new
technologies require a highly efficient research system, democracy, a
national ecosystem with a specific dominant religion and a constant
over-time population growth. (see e.g., Coccia 2010; 2014; Barro and
McCleary, 2003) Recent studies on the effect of structural change on
economic growth investigate technological change by examining the
consequences of both the change in the structure of the national
economy in favor of “high-tech” activities, and countries that mainly
specialize in “low-tech” industries (Fagerberg, 1994 and 2000). Salter
(1960) also note that a flexible structure is an important factor in high
productivity growth as it enables economies to quickly reallocate their
resources to maximize the benefits of changing patterns of technolo-
gical progress. Some studies also investigate the effects of structural
change on both the return on R&D intensity and the tendency of falling
profit (Frantzen, 2000; Wolff, 2003).
The idea that structural change can potentially influence innovative
activity is derived from two complementary strands of theories. On the
one hand, the Shumpeterian view of innovation stresses that innovation
is the main engine for economic growth in the capitalist economy
(Schumpeter, 1928 and 1939). According to Schumpeter (1942), in-
novation as the engine of economic growth is always on, since new
markets, regardless if it's domestic or foreign, and development of or-
ganizations show the same process of industrial change, which con-
stantly changes the “economic structure from within”, constantly
manifests the process of creative destruction. Zachariadis (2003) also
supports Schumpeter's endogenous growth framwork and provides
evidence for the logical chain from “R&D intensity to patenting, pa-
tenting to technological progress, and technological progress to eco-
nomic structural change” through an empirical research on pattern of
industrialization of the United States. On the other hand, the creative
destruction theory by Schumpeter is adopted by Kuznets to form his
retardation theory on how economic growth leads to structural change.
Kuznets (1972) notes that the structural change within an economy is
fueled by radical innovations, as innovations create new jobs and de-
stroy the old ones. This then has a dislocating effect on employment,
which shifts from old to new sectors, with switching cost proven to be
particularly difficult.
Quatraro (2009) therefore combines these two main strands of
theories on creative destruction and creative response, and put forward
a theory on a “self-propelling process” featured by constant economic
change due to both creative destruction and creative reaction. He ar-
gues that firms innovate because they need to adapt to the environment
they operate within. When the operation environment for firms be-
comes hostile, in the sense that opportunities for further expansion
(increase in market share) is scarce, then firms start to innovate more.
However, when the number of firms in an industry innovating keeps on
increasing, but the overall productivity growth within such industry
keep on decreasing (probably due to saturation), then the retardation
process takes over, and innovation starts disspearing in such industries.
The theory of self-propelling process can be verified by literature from
the firm-level studies. For example, Coccia (2017) suggests firms have
C. Wang and Y. Lu Technological Forecasting & Social Change 159 (2020) 120194

strong incentive to find innovative solutions to unresolved problems,

with a view to achieving the goal of short-run monopoly and compe-
titiveness in markets characterized by technological momentum. Si-
milar findings also exist in the research on assessing the impact of new
technologies on firm size and boundaries. (Dosi et al., 2008)
Quatraro (2009)’s framework therefore predicts that (1) in early
industrialized economies (i.e. developed economies), the growth en-
hancing feature of the manufacturing industry is in the process of being
exhuasted, and the process of shifting to the service based industry is
ongoing and about to take over. On the other hand, for economies late
to the industrialization process (i.e. developing economies in large),
manufacturing industries still drives most of the productivity growth,
despite the efforts to transition into the knowledge based economy. (2)
For late to industrialize economies, manufacturing industries still ac-
count for most of the innovative activities. For early industrialized
economies, most of the innovative activities are not from the manu-
facturing industries, rather, they are from new industries which are
knowledge intensive and often times service based (for e.g., design
activities etc.). “The industrial base is shrinking and the advantages
from knowledge externalities are declining” (Quatraro, 2009;
Coccia, 2017). By extension, this prediction may explain previous lit-
erature about the effect of structural change on economic growth may
vary according to the level of development of different economies (see
e.g., Jorgenson, 1995; De Vries et al., 2012; McMillan et al., 2014;
Szirmai, 2012; Rodrik, 2016).
Based on above review of literature, we recognize the necessity of
explaining technological change, innovation and economic growth
pattern in countries that have different national systems and levels of
development, such as countries with low, lower middle, upper middle
and high income. However, current studies are mainly focused on ex-
plaining the intranational relationship between innovation activities
and economic structural changes, such as Quatraro's (2009) study of 20
Italian regions. By extending Quatraro's(2009) work, this paper in-
vestigates the relationship between structural change and innovation in
a global context and identify structural change through the shift be-
tween three main economic sectors (agriculture, industry and service)
which cover a country's most economic activities. From the dataset
which covers 75 developing and developed countries with the year
coverage range from 1970 to 2012, we mainly expect to compare the
differences between innovative activities and economic structural
changes in established countries (such as the United States, United
Kingdom and Japan) and emerging countries (such as India, China) as
well as low income countries.
Methodology
Data
Fig. 1. Sector shares of GDP.
Notes: Fig. 1 and 2 are produced using the size of share of GDP and employ-
ment respectively on the vertical axis, and time on the horizontal axis.
patterns and trade. According to Roman (1969), changing the pattern of
growth rates between different sectors is an indication of structural
change Van Ark (1996). follow the definition of Kuznets and Mruphy
(1966) and used the sectoral share of employment as a weight to cal-
culate the labor productivity growth. Lindmark and Vikstr (2002) ex-
plain that structural is the “composition of production and the alloca-
tion of production factors” that changes over time.
Based on these definitions, structural changes can be considered as
continuing reallocation process of factors of production, reflected by
the change in relevantive importance of different sectors. In this paper,
we follow both Kuznets and Murphy (1966) and Van Ark (1996)’s
procedure to measure the structural change as sector shares of em-
ployment and GDP. We define sectors by World Bank's classifications of
the agricultural, industry and service sectors. These sector shares data
are obtained from World Bank's WDI, measured in percentage points.
The gradual change in relative importance of different sectors
(measured by the size of share of GDP/employment) can be clearly seen
in Figs. 1 and 2. On average, the 75 countries involved in our study
generally experienced a gradual increase (decline) in the service
(agricultural) share of both GDP and employment. The pictures of the
industry shares across the GDP and employment shares are mixed. On
the one hand, the clear trend of decline is seen by the employment
measure, on the other hand, the trend of industry share of GDP is not as
clear. This is perhaps due to the fact that industrial productivity growth
has transformed the sector from labor-intensive ones to capital in-
tensive ones for the past few decades throughout the developing and
developed world.

We collect balanced panel data on structural change, researchers

and engineers engaged in R&D, R&D expenditure, financial develop-
ment, human capital, openness and arable land rates for 75 developed
and developing countries from 1970 to 2012. The following discuss
core variables in details:

Structural change

In the current literature, different measures of structural change

have been defined and used extensively. For instance, according to
Kuznets and Murphy (1966), a major part of structural changes com-
prises with changes in the sectoral share of employment or output.
Chenery et al. (1986) explain it in a different way that structural change Fig. 2. Sector shares of Employment.
is not only the shift of employment between industires over time, but it Notes: Fig. 1 and 2 are produced using the size of share of GDP and employ-
also involves changes in factors of production, technology, the demand ment respectively on the vertical axis, and time on the horizontal axis.

3
C. Wang and Y. Lu
Fig. 3. R&D and the Agriculture Sector.
Notes: Figs. 3 and 4 show cross-country relationships between innovative ac-
tivities and agricultural share (Fig. 3) and service sector share (Fig. 4) of GDP
respectively. The vertical axis of both figures represents the innovative activ-
ities (N/L).
Innovation activity
Following Wang (2013), Innovation activity as measured by R&D
intensity is constructed using two approaches: the share of scientists
and engineers engaged in R&D activities in total labor force (N/L) and
the fraction of R&D expenditure in total GDP (R/Y). All two indicators
are measured in percentage points. The sources of the R&D labor data
(N) are the United Nations Educational, Scientific, and Cultural Orga-
nization (UNESCO) statistical yearbooks. Some missing data across the
time dimension are interpolated. The data source for R&D expenditure,
labor force, and real GDP is the World Bank. N/L is used in my core
specification. R/Y is selected as an alternative measure of R&D intensity
for the purpose of robustness checks. These R&D intensity measures
have been widely used in the current literature (see e.g. Acs et al., 2002,
Aghion and Howitt, 2006, 2009; Wang, 2013).
Fig. 4. R&D and the Service Sector.
Notes: Figs. 3 and 4 show cross-country relationships between innovative ac-
tivities and agricultural share (Fig. 3) and service sector share (Fig. 4) of GDP
respectively. The vertical axis of both figures represents the innovative activ-
ities (N/L).
4
Technological Forecasting & Social Change 159 (2020) 120194
Although there is an increasing number of studies using number of
patents as an alternative measurement of innovation activity (see e.g.,
Du et al., 2019; Du and Li, 2019), in this paper, we are more focused on
the relationship between input of innovation activity (measured by N/L
and R/Y) and structural change rather than its outcome. In addition,
patent counts have natural defects that they cannot reflect the quality of
different patents. For example, Swann (1993) argues that the value of
individual patents is highly skewed. Therefore, we believe that simply
counting the number of patents does not reflect the actual level of in-
novation activities.
It's quite evident that from Figs. 3 and 4 that, on the one hand, the
clear negative relationship between agricultural share of GDP and in-
novation can be seen from Fig. 3, on the other hand, the clear positive
relationship between service sector share of GDP and innovation can be
seen from Fig. 4. These graphs give preliminary results on the potential
relationship between innovation and structural change in a cross-sec-
tion manner. However, whether this relationship truly exists requires
more econometric analysis by taking advantage of our panel data.
Control variables (Financial development, human capital, openness)
Financial development, human capital and openness are included in
the core model to control their potential effects on R&D intensity. These
indicators are widely used in previous studies on innovative activities as
standard control variables (please see e.g., Wang and Naveed, 2019 and
Wang (2013)). Moreover, we employ identification strategy that take
care of endogeneity (2SLS and System GMM) to ensure differences in
innovative activities across countries can be fully analyzed.
Financial development or liberalization has long been argued as a
potential determinant of R&D fueled endogenous growth. (see e.g.
King and Levine (1993), Levine (2005) and Griliches (1998)). Ac-
cording to Levine (2005), there's a general consensus among economists
that economic growth can be promoted by more developed domestic
financial markets, in that firms in such conditions gain better access to
credits, which then facilitates the financing of investment and R&D
activity, in turn leading to productivity growth. We therefore decide to
control financial development in our regressions, investigating the ef-
fect of structural change on innovation. Like in Wang (2013), we use
principal component analysis to combine two indicators that measure
financial development commonly used in the literature. “The twoindi-
cators are: domestic credit provided by private sectors (% of GDP),
domestic credit provided by banking sectors (% of GDP)” (Wang, 2013).
The data source is World Bank.
Following Wang (2013), we also control the potential effect of
human capital on innovation, as also suggested by the unified growth
theories (see e.g., Galor and Mountford (2003), Galor and Weil (2000),
Galor and Moav (2002, 2006)). These theories suggest that in the
second phase of the industrial revolution, human capital formation is
one of the most important factors relevant for the transition from
stagnation to growth, and has contributed significantly to the great
divergence in economic growth across countries. We therefore decide to
control the effect of human capital on R&D in our core regressions.
Human Capital is measured by educational attainment (gross comple-
tion rates, see Table 1 notes for details), and the data source is Barro
and Lee's schooling dataset (2013) at World Bank.
Trade openness is also an important determinant of innovation as
suggested by the endogenous growth theory (see e.g., Grossman and
Helpman (1991), Romer (1990), Aghion and Howitt (1992),
Wang (2013)). The central idea is that innovation can sustain long-run
economic growth because the technological parameter in the en-
dogenous growth model is derived from a monopolistic production
process in which low-tech countries can catch up with the high-tech
countries through imitation facilitated by international trade. For e.g.,
C. Wang and Y. Lu
Barro and Sala-i-Martin (1996) show that follower countries can speed
up their innovation drive by imitating the leader country (standing on
the shoulder of the Giant), and this imitation process is best facilitated
by international trade. Trade Openness is measured by the ratio of total
trade to real GDP (T/Y), a country is more open if its share of GDP from
total trade is larger.
Instrumental variable (arable land rate) and identification strategy
It's highly plausible that we have endogeneity issues when analyzing
the relationship between innovation and structural change, as the two
variables could be simultaneously influenced by a third variable such as
government expenditure (see e.g. Zhu and Wang (2011), Easterly and
Rebelo (1993) and Canning and Pedroni (2004)). In addition, reverse
causality could be another issue. While structural change can poten-
tially influence innovation, it's certainly plausible that an economy with
improved innovative activity and research intensity could stimulate the
change of economic structure towards the more innovative sector as
well. To address these concerns, we instrument structural change by
arable land rate.
The Rybczynski theorem (see Rybczynski (1955) and Krugman and
Obstfeld (2007)) in trade theory predicts that when one factor of pro-
duction increases at a faster rate than that of others, the sectors that
uses such factor more intensively increase outputs at a faster rate than
do other sectors. In the early stage of development (true to both the
19th century industrial revolution and recent economic structure shift
in the emerging economies), this shifts a country's production away
from agriculture to manufacturing (i.e. from labor intensive industries
to capital intensive industries). In later tertiary stages of development,
this then involves a shift from manufacturing industry to service sectors
which are more knowledge and skill intensive, as supplies of human
capital increases over time.
What's central to the above argument is that there has to be an in-
itial constraint on natural resources, which sparks differential growth
factors later on. And this initial constraint can be best reflected by the
natural scarcity of arable land, as land usage differs among countries
due to the fact that agricultural land resources are fixed. Land-scarce
countries therefore must use their land more intensively (e.g. horti-
culture and some livestock products). Rapidly growing economies
therefore have more incentives to shift the composition of their outputs
for productions that use factors that are increasing more rapidly. This
was especially relevant for the East Asian economies where rapid in-
crease in the accumulation of human capital and physical capital led to
the abolition of agriculture based economy (due to land scarcity, even
in the case of China, where the population is huge compared with its
arable land resources), and an increase in manufacturing activity. Due
to the large number of developing countries involved in our sample,
and the fact that our panel data covers recent decades, when most of the
economic sector shift occurred in developing countries, we decide to
instrument structural change with arable land rates. In particular, we
use agricultural land per person in the core regressions due to the fact
that it is a better measure than the arable land to total land ratio, which
is used in the robustness checks. The exclusion restriction of using
arable land as an instrumental variable is likely to hold, since arable
land is not likely to directly affect R&D, and that its potential impact on
R&D, if exists, is most likely through its impact on structural change.
We also acknowledge the natural limitation of using only one in-
strumental variable, and therefore conduct our analysis in system GMM
as a robustness check. As illustrated by Blundell and Bond (1998), the
System GMM technique estimates a dynamic panel model which utilizes
internal time lags of endogenous variables as instrumental variables. To
address the potential issue of too many internal instruments, we follow
Roodman (2009b) to collapse the instrument matrix, so that one
5
Technological Forecasting & Social Change 159 (2020) 120194
instrument is created per variable and lag distance instead of having
instruments created for every year per variable and lag distance. This
approach is used as a robustness check, since recent literature has
pointed out the weak instrumentation problem of system GMM (see e.g.
Bun and Windmeijer (2010)).
Table 1 provides summary statistics on the key variables in the core
regressions. The variable definitions can be found in the Table 1 notes
below. The notable differences between means and standard deviations
for our control (FDPCA, HPCA, Open) and structural change variables
suggest high variation in both the cross-country and time dimension.
On the contrary, our dependent variables (N/L, R/Y) have low varia-
tions, suggesting a plausible stationary time-series for both types of
variables. We provide the skewness and kurtosis of the variables, which
shows that most variables have a good normality (except N/L and
openness have a relatively large value in kurtosis). Also,
Wooldridge (2010) states that when the normality assumption is not
valid, “the estimates are still consistent and the central limit theorem
allows one to make inferences that are valid in an asymptotic sense.”
Results and discussion
Main results (OLS and iv regressions)
For the OLS regressions, we attempt to analyze the following panel
linear model with fixed effects:
Ni, t
= + 1 Si, t + 2 Xi, t + +
0 i i, t
L i, t (1)
Where Si, t is structural change measured by agricultural, industry and
N
service sector shares of GDP, i, t is R&D intensity measured by the ratio
Li, t
of R&D labor to labor force, Xi, t is a set of control variables including
human capital, financial development and openness. δi denotes fixed
effect, and is the error term.
Columns (1) to (6) in Table 3 show results from the panel OLS re-
gressions with fixed effects. Columns (1) to (3) and Columns (4) to (6)
show results with and without controls respectively. It's quite evident
from these results that sector shares are significant in explaining R&D.
In particular, agriculture share has a negative impact on innovation,
while the impact of the service sector share of GDP is positive. The
impact of industry is ambiguous. We report the standardized coeffi-
cients after the non-standardized ones. Since both R&D intensity and
structural shares are measured in percentage points, the results suggest
that, for example in Column (1), a 1 percentage point increase in
agriculture share of GDP, results in a 0.013 percentage point decrease
in R&D intensity. This can be compared with the results in Columns (2)
and (3), which says that a 1 percentage point increase in industry and
service sectors share of GDP, results in a 0.001 and 0.008 percentage
points increase in R&D intensity respectively. Results from Columns (4)
to (6) largely confirm the above findings with control variables in-
cluded. Clearly, an economic structural change shifting away from
agriculture and toward industry and services, seems to promote R&D
activity. This confirms Quatraro (2009)’s view that regardless of eco-
nomic status, countries shifting away from preliminary sectors and to-
wards more tertiary sectors will experience increase in innovation.
Moreover, the F statistics suggest joint significance between our core
structural change variables and control variables. It is notable that the
value of R2 from estimations with control variables (Columns (4) to (6))
is higher than those without control variables (Columns (1) to (3)). The
increase in the value of R2 suggests that the model is better explained
with control variables included, further justify the inclusion of these
controls. According to many previous cross-country studies in social
science and economics, it is evident that the value of R2is acceptable
C. Wang and Y. Lu Technological Forecasting & Social Change 159 (2020) 120194

Table 1
Summary Statistics.
Variable Observations Mean Std. Dev. Min Max Skewness Kurtosis

N/L (%) 3225 0.266 0.337 0.001 3.117 2.380 11.664

R/Y (%) 1224 0.998 0.969 0.006 4.13 1.103 3.187
Sagri (%) 3225 12.164 10.617 0.036 65.461 1.210 4.240
Sind (%) 3225 33.146 10.660 6.073 90.513 1.153 6.255
Sserv (%) 3225 54.690 12.428 8.150 83.976 −0.491 3.044
empagri (%) 2475 23.131 24.137 0.000 100 1.333 4.034
empind (%) 2473 24.669 7.770 0.588 50.2 −0.081 3.314
empserv (%) 2471 51.905 19.477 2.593 88 −0.721 2.633
FDPCA (unit) 3139 1.33e-09 1.385 −1.181 7.314 1.664 6.430
HPCA (unit) 3139 9.75e-10 1.305 −2.068 4.071 0.960 3.127
open (%) 3225 69.456 48.048 4.983 439.657 2.978 17.522
arable (hectares per capita) 3225 0.334 0.406 0.000 3.327 3.544 19.598
agriland (%) 3225 17.308 15.181 0.056 62.804 1.096 3.347

Notes: Sagri is the agriculture sector share of GDP (%). Sind is the industry sector share of GDP (%). Sserv is the service sector share of GDP (%). empagri is agriculture
sector share of total employment. empind is the industry sector share of total employment (%). empserv is the service sector share of total employment (%). N/L is the
number of researchers and engineers divided by labor force (%). R/Y is R&D expenditure divided by GDP (%). HPCA is the first principal component combination of
primary, secondary and tertiary education gross completion ratios (unit). FDPCA is the first principal component combination of domestic credit to private sectors,
and domestic credit provided by financial institutions (unit). open is the openness of an economy, which equals total trade values (exports + imports) divided by GDP
(%). arable is arable land per person (hectares per capita). agriland is agriculture land area divided by the total area of a country (%). The correlation table can be
found in the Appendix (Table A1). Data sources can be found in Table A2 in the appendix.

Table 2 instrumental variable for IV regression. Columns (1) to (3) from Table 2
Exogeneity test (Auxiliary regressions) for instrument (agriculture land). report the results of auxiliary regressions that treat agriculture land as a
Panel OLS Regressions
control variable. The results of insignificant p-values of agriland suggest
(1) N/L (2) N/L (3) N/L that agriculture land has no impact on innovative activities.
Columns (7) to (12) in Table 3 show the results from IV regressions
Sagri 0.003 with fixed effects with the first three columns excluding controls and
(0.94)
the latter three including them. The IV results are consistent with the
Sind 0.006**
(2.12) OLS results. The significant positive impact of service sector share of
Sserv −0.006** GDP and the significant negative impact of agriculture share of GDP on
(−2.23) R&D intensity are quite evident. The first-stage results show strong
FDPCA 0.091*** 0.090*** 0.096***
significant positive impact of arable land endowment on agriculture
(4.55) (4.86) (4.85)
HPCA 0.049** 0.062*** 0.069*** share of GDP, and the strong negative relationship between arable land
(2.17) (2.87) (3.33) endowment and service sector share of GDP with significant F-test re-
open −0.001 −0.001* −0.001 sults, suggesting the validity of our instrument. Due to the fact that we
(−0.85) (−1.69) (−0.94) have only one instrument, we perform under-identification test using
agriland 0.000 −0.002 −0.001
the Anderson canon. corr. LM statistics. The null hypothesis is that the
(0.01) (−0.36) (−0.33)
Observations 3096 3096 3096 instrument is under-identified, and this is rejected at the 1% sig-
No. of Countries 72 72 72 nificance level, suggesting our instrument can sufficiently identify
Fixed effects Yes Yes Yes sector shares in the 2SLS regressions.
F (p-value) 10.87 10.58 10.44
Moreover, comparing Columns (1) to (6) with Columns (7) to (12),
(0.000) (0.000) (0.000)
R2 0.29 0.30 0.27
it's evident that there's a notable difference between the size of coeffi-
cients on sector shares from OLS regressions and those from the IV
Notes: The regressions are estimated using the panel OLS with fixed effects. The regressions. The much larger size of coefficients in the IV regressions
year coverage ranges from 1970 to 2012, z-values are in the parentheses. suggests that the OLS regressions may suffer from measurement errors,
Columns (1) to (3) report the results that use agriculture land as a control on top of the concerns for reverse causality and the common third
variable to test its exogeneity as an instrumental variable. variable influencing both innovation and productivity. Another im-
portant thing to notice is that industry becomes insignificant in ex-
(see e.g., Barro, 1996; Levine and Renelt, 1992; Ferreira et al., 2013). plaining R&D intensity in the IV regressions with controls included (the
Moreover, we believe the low R2 (especially Column (2), Table 3) is at impact is reversed and significant when controls are excluded), sug-
least partly caused by unobservable variables, which also can be taken gesting the impact of shifting away from agriculture and toward in-
care of by the IV regression. dustry perhaps is less robust than the impact of shifting toward service.
For the panel IV regressions with fixed effects, we estimate Eq. (1) This is not surprising considering the fact we have a global sample, and
for the second stage and the following equation for the first stage: there's a great divergence between developed and developing countries
in terms of development path. According to Quatraro (2009), countries
Si, t = 3 + 4 agriculture + 5 Xi, t + i + vi, t (2)
that are currently shifting away from manufacturing industries and
Where agriculture denotes the instrumental variable (i.e. the size of towards service sectors probably rely on service to boost innovation
arable land per person (arable) or the share of agriculture land in total further, whereas countries currently are still industrializing, derive
land area (agriland)) and v is the error term. most of their innovation incentives from the manufacturing sector.
A set of auxiliary regressions are estimated (see Table 2) to provide Whether this is true or not requires further analysis by splitting the
the empirical evidence of exogeneity of agriculture land as the sample into different country groups characterized by income, we

6
C. Wang and Y. Lu Technological Forecasting & Social Change 159 (2020) 120194

Table 3
Structural Change and Innovation: OLS and 2SLS Results.
Dependent Variable: N/L
Pooled OLS Regressions Panel IV Regressions
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)

Panel A: 2nd stage results for 2SLS

Sagri −0.013*** −0.003*** −0.028*** −0.015***
−0.417*** −0.103*** −0.883*** −0.460***
(−31.15) (−7.96) (−12.46) (−4.05)
Sind 0.001** 0.002*** −0.067*** −0.112
0.042** 0.073*** −2.138*** −3.480
(2.29) (4.32) (−6.25) (−1.17)
Sserv 0.008*** −0.000 0.020*** 0.013***
0.319*** −0.009 0.730*** 0.482***
(15.08) (−0.41) (11.70) (3.72)
FDPCA 0.058*** 0.068*** 0.067*** 0.075*** 0.039 0.071***
(10.52) (13.21) (12.78) (12.93) (0.86) (10.09)
HPCA 0.099*** 0.108*** 0.108*** 0.033*** −0.249 0.001
(21.37) (24.24) (20.91) (5.34) (−0.98) (0.05)
open −0.000*** −0.000*** −0.000** −0.002*** 0.004 −0.001***
(−3.43) (−2.76) (−2.60) (−5.37) (0.97) (−4.78)
Observations 3225 3225 3225 3096 3096 3096 3225 3225 3225 3096 3096 3096
Fixed effects No No No No No No Yes Yes Yes Yes Yes Yes
F (p-value) 970.23 5.26 227.37 803.96 632.11 619.92 155.10 38.99 136.92 208.89 17.39 175.98
(0.000) (0.021) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
2
R 0.17 0.002 0.10 0.36 0.36 0.35 0.17 0.002 0.10 0.14 0.02 0.18
Panel B: 1st stage results for 2SLS
Instrumented Sagri Sind Sserv Sagri Sind Sserv
arable 17.464*** 7.239*** −24.710*** 10.116*** 1.331 −11.454***
(23.21) (7.13) (−20.83) (14.86) (1.28) (−10.63)
Under-Identification 460.13 50.06 381.53 205.96 1.63 109.03
Test Statistics (p- (0.000) (0.000) (0.000) (0.000) (0.202) (0.000)
value)
F (p-value) 538.66 50.85 433.98 220.72 1.63 112.96
(0.000) (0.000) (0.000) (0.000) (0.202) (0.000)
R2 0.15 0.01 0.12 0.40 0.14 0.40

Notes: The regressions are estimated using the panel OLS with heteroskedasticity consistent standard errors and IV models with fixed effects. We report stan-
dardized coefficients after the non-standardized ones for the key explanatory variables (sector shares). The year coverage range from 1970 to 2012, z-values
are in the parentheses. The instrumented variables are Sagri, Sind and Sserv. Panels A and B report results from 2nd and 1st stage regressions respectively. Due to the fact
that there's only one exclusive IV variable arable (i.e. IV model is exactly identified under the Sargan-Hansen over identification test), we report the Anderson canon.
corr. LM statistic to test whether our IV model is under-identified. The null hypothesis is that the IV model is under-identified. Significance at the 10%, 5% and 1%
levels are indicated by *, ** and ***.

provide these analyses later. The results on control variables confirm
the positive impacts of financial development, and human capital on R&
D intensity, acknowledging the findings from Levine (2005), Galor and
Weil (2000) and Barro and Sala-i-Martin (1995). Note that the signs on
openness (a control variable) is unexpectedly negative, this however is
not a problem, as Cinelli and Hazlett (2020) point out the coefficients
of control variables do not have substantive meaning (hence, un-
expected signs are not a problem) when other unobservable factors are
confounded with the observable controls. The interpretation of the core
explanatory variable is still valid as long as the unobservable factors are
not directly correlated with the core explanatory variable (which is
taken care of by the treatment of endogeneity).
From all columns in Table 3, the significant impact of service sectors
on innovation and the significant negative impact of the agriculture
sector on innovation suggest at least two points: (1) Shifting from an
agriculture based economy to an industrialized one (for e.g., Sub-sa-
haran Africa) and shifting from a manufacturing based economy to a
consumer-led one (for e.g., China) can potentially help stimulate the
need for innovation as the industry and service sectors grow faster in a
more knowledge based economy. (2) Whether this significant positive
impact of structural change (from agriculture to industry and service)
on innovation is universal across different types of transition phases
remains to be checked, in particular, we want to find out whether the
above effect results from a particular type of transitioning economy,
hence, prompts us to investigate this matter later.
Robustness checks
So far, we have attempted to explain innovation by structural
change using only one particular type of measure of structural change
and R&D intensity and a specific measure of our instrumental variable
(arable land intensity). There are certainly opportunities to explore
alternative measures of R&D, structural change as well as arable land to
ensure that our results are not driven by the specific choices of mea-
sures used in the core model. There's also the benefit to use alternative
estimation techniques to ensure that our results are not driven by the
particular physical instrumental variable that we use.
To address these issues, we perform four types of robustness checks
in Table 4. First, we check whether our core results are robust to the
inclusion of an alternative measures of R&D (R/Y, i.e. R&D expenditure
intensity). Second, we check whether our results are robust to an al-
ternative measure of sector shares: agriculture, industry and service
sector shares of employment (empagri, empind and empserv). Third, we
estimate our core model using an alternative instrumental variable
measuring arable land intensity: agricultural land area divided by total
area of a country. This measure is less ideal than arable land per person,

7
 C. Wang and Y. Lu

Table 4
Robustness to Alternative Measures of Structural Change, Innovation, Instrumental Variable and Estimation Technique.
Alternative Measure of Structural Change Alternative Measure of Innovation (R/Y) Alternative Instrument (agriland) Two-step System GMM
(1) N/L (2) N/L (3) N/L (4) R/Y (5) R/Y (6) R/Y (7) N/L (8) N/L (9) N/L (10) N/L (11) N/L (12) N/L

Panel A: 2nd stage results for 2SLS

L.(N/L) 0.987*** 0.958*** 0.991***
(138.51) (55.50) (78.04)
Sagri −0.073*** 0.001 −0.001***
−0.537*** 0.043 −0.024***
(−3.32) (0.03) (−5.20)
Sind 0.263 −0.000 −0.000
0.694 −0.006 −0.008
(0.85) (−0.03) (−0.61)
Sserv 0.100** 0.000 0.000***
1.129** 0.009 0.014***
(2.16) (0.03) (3.17)
empagri −0.015***
−0.969***
(−4.03)
empind −0.048***
−1.009***
(−3.95)

8
empserv 0.023***
1.241***
(4.05)
Observations 2376 2374 2372 1173 1173 1173 3096 3096 3096 3024 3024 3024
No. of Countries 72 72 72 69 69 69 72 72 72 72 72 72
No. of Instruments 40 15 15
AR(1) (0.000) (0.000) (0.000)

AR(2) (0.262) (0.251) (0.296)

Sargan-Hansen test of over-identification (p-value) 40.15 10.31 13.80
(0.253) (0.414) (0.182)
Diff. in Hansen Test (p-value) 31.99 6.72 6.67
(0.368) (0.242) (0.246)
Fixed effects Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Control Variables Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
F (p-value) 77.75 74.62 78.66 71.83 4.66 30.36 230.30 229.29 229.08
(0.000) (0.000) (0.000) (0.000) (0.001) (0.000) (0.000) (0.000) (0.000)
R2 0.21 0.05 0.12 0.31 0.005 0.24 0.24 0.23 0.23
Panel B: 1st stage results for 2SLS
Instrumented empagri empind empserv Sagri Sind Sserv Sagri Sind Sserv
arable 19.264*** 5.942*** −12.282*** 7.109*** −1.960 −5.145**
(6.67) (5.84) (−7.89) (5.28) (−0.89) (−2.27)
agriland −0.039 0.267*** −0.228***
(−1.14) (5.30) (−4.29)
(continued on next page)
Technological Forecasting & Social Change 159 (2020) 120194
C. Wang and Y. Lu Technological Forecasting & Social Change 159 (2020) 120194

variables (sector employment and GDP shares). The year coverage range from 1970 to 2012, z-values are in the parentheses. The results on control variables are not reported. Columns (1) to (3) report results from
alternative measures of structural change (sector employment shares). Columns (4) to (6) report results from alternative measures of innovation (R/Y). Columns (7) to (9) report results from alternative instrumental

test), we report the Anderson canon. corr. LM statistic to test whether our IV model is under-identified. The null hypothesis is that the IV model is under-identified. For system GMM, we report the Sargan-Hansen test of
over identification. We also report the number of instruments (lags) used in the system GMM process and ensure that the number of instruments is less than the number of countries. L.(N/L) is the lagged dependent
Notes: The regressions are estimated using the panel IV model with fixed effects, and the two-step system GMM estimator. We report standardized coefficients after the non-standardized ones for the key explanatory

variable (agriculture land divided by total area of a country). Columns (10) to (12) report results from the system GMM estimator. The instrumented variables are empagri, empind, empserv, Sagri, Sind and Sserv. Panels A and B
report results from 2nd and 1st stage regressions respectively. Due to the fact that there's only one exclusive IV variable arable or agriland (i.e. IV model is exactly identified under the Sargan-Hansen over identification
since the latter is a more equitable measure of arable land intensity
(12) N/L which also takes into account population size of a country. Finally, we
utilize system GMM (see Blundell and Bond (1998)), which uses in-
ternal lags as instruments for each endogenous regressor, as an alter-
(11) N/L

native estimation technique and treat all explanatory variables (in-

Two-step System GMM

cluding control variables) as endogenous. The decision to use system

GMM for robustness checks only is made upon the observation that
physical instrument is considered a better identification strategy than
(10) N/L

internal lags based two-step system GMM process due to the weak in-
strumentation problem of system GMM (see e.g. Bun and
Windmeijer (2010)). In general, the System GMM technique estimates
the following equation:
N /Li, t = + 7 N / Li, t 1 + 1 Si, t + 2 Xi, t + ui, t (3)
(9) N/L

(0.000)

(0.000)

6
Alternative Instrument (agriland)

18.28

18.37

0.38

Where N /Li, t 1 is the lag of N/Li, t, note that, System GMM already
includes country specific fixed effects.
variable. See notes in Tables 1 and 3 for other information including variable definitions. Significance at the 10%, 5% and 1% levels are indicated by *, ** and ***.

From Columns (1) to (3) in Table 4, it's quite evident that our results
(8) N/L

(0.000)

(0.000)

are not driven by the choice of structural change measures. The nega-
27.83

28.05

0.15

tive impact of agriculture sector on innovation and the positive impacts

of service sectors are still very strong and significant. Comparing the
sizes of the standardized coefficients on employment sector shares with
(0.2526)

(0.2529)
(7) N/L

GDP sector shares, it seems that the former has a much stronger impact
1.31

1.31

0.36

on R&D than the latter. The associated first stage results suggest all
models are sufficiently identified by the core instrumental variable:
arable land per person. Moreover, the significance of human capital,
financial development in influencing R&D are also consistent with the
(6) R/Y

(0.023)

(0.023)
Alternative Measure of Innovation (R/Y)

5.15

5.16

0.18

results found from the core regressions presented in Table 3.

Column (4) to (6) in Table 4 give results on the core model esti-
mated using the share of R&D expenditure in GDP (R/Y) as the R&D
intensity measure, not surprisingly, we find consistent significant po-
(5) R/Y

(0.371)

(0.372)

sitive impact of service sector shares on R&D, and a significant negative

0.80

0.80

0.09

impact of agriculture sector shares. These results seem to reinforce an

earlier finding (Column 11 in Table 3) in the IV regressions that the
impact of industry sector on R&D is ambiguous. The size of the coef-
ficients has dropped a bit, suggesting the impact of economic structural
(4) R/Y

(0.000)

(0.000)
27.25

27.84

change on R&D expenditure intensity is weaker. All in all, our results

0.17

are not driven by the specific choice of measure of R&D that we choose,
as the two most common measures of R&D intensity give consistent
results.
Columns (7) to (9) in Table 4 give results from using the ratio of
Alternative Measure of Structural Change
(3) N/L

(0.000)

(0.000)
60.71

62.25

agricultural land area to total area as an alternative instrumental

0.48

variable. These results suggest the impacts of sector shares on innova-

tion are not significant. The insignificance results shouldn't be very
surprising giving that the fraction of agricultural land is not an ideal
(2) N/L

(0.000)

(0.000)

measure of arable land endowment and equity in the first place. For
33.62

34.06

0.23

e.g., China may have much less agricultural land share of total area
than India does, but the arable land per person figures between China
and India are much closer and similar, simply because China is roughly
3 times the size of India in area.
(1) N/L

(0.000)

(0.000)

Columns (10) to (12) in Table 4 give results on the core models

43.71

44.47

0.16

estimated using two-step System GMM. The notable much smaller

standardized coefficients on the sector shares and control variables
compared with those in the core model are not surprising, since in-
cluding the lagged dependent variable as an explanatory variable has a
Under-Identification Test Statistics (p-value)

distortion effect on the size of coefficients on other explanatory vari-

ables due to the overwhelmingly high correlation between the depen-
dent variable and its lagged version. Hence, what needs to be focused
on here is the consistent sign and significance of our coefficients, de-
spite using a radically different estimator with completely different
identification strategy, we are able to show consistent significant po-
Table 4 (continued)

sitive (negative) impact of the agriculture sector (service sector) on R&

D intensity. In all system GMM regressions, we use less number of in-
struments than countries by using the instrument matrix collapsing
F (p-value)

technique. The p-values from AR (1) and AR (2) tests suggest that as
expected, there are significant first order but no second-order auto-
R2

correlation. The P-values from Hansen-J and Difference in Hansen tests

9
C. Wang and Y. Lu
indicate that the instruments are not over-identified and confirm the
exogeneity of the instruments.
Columns (1) to (3) in Table 6 in the Appendix A4 give the results on
including 2 sector shares at a time in one regression. It's clear from these
results that regardless if we include the three sector shares separately or
include two at a time (including all three will result in perfect collinearity),
the positive impact of the service (tertiary) sector on innovation, as well as
the negative impact of the agriculture (primary) sector on innovation are
confirmed. The insignificance of the industry (second) sector is also con-
firmed. These results are consistent to those find in the core model where
sector shares are entered one at a time. All in all, this robustness check
further confirms that shifting away from the agriculture and towards the
service (tertiary) sector is conducive to innovation, while the impact of the
industry (second) sector is different in economies with different level of
development (i.e. positive for countries at lower level of development and
negative for economies that are already developed), resulting in an overall
insignificant impact on innovation. The reason for using System GMM to
run these regressions is due to the fact that we have only one available
physical instrument (arable land), however in this case, 2SLS estimator is
not able to handle more than 1 endogenous variable. The results are robust
to our core specification: the decrease in the share of agriculture and the
increase in the share of services are both reasons for the growth of in-
novative activities.
Overall, these four types of robustness checks suggest that our core
results are not driven by the choice of core independent and dependent
variables, nor has it been influenced by the specific estimation tech-
nique we use.
Further robustness checks: the effect of structural change on innovation in
different economies
So far, we have looked at the impact of structural change (measured
by GDP and employment sector shares) on R&D intensity in a global
sample. However, there are great concerns concerning the nature of
structural transition in different types of economies. A closer look at our
sector shares data, it's quite evident that the developed economy has
matured for the past two decades or so with tertiary (service sector
dominated) economy comprises most of the GDP and productivity
growth while the developing economies, depends on their income level,
are experiencing a lot of structural change in their economies
(Doyle and OLeary (1999)). But even within the developing economies,
different countries are certainly at different development phases. For
e.g., most of the low income countries are still experiencing in-
dustrialization and a gradual reduction in reliance on agricultural based
growth, while upper middle income countries are experiencing a dif-
ferent transition path from an industry dominated economy to a service
oriented consumer-led one (Isaksson (2010)).
Therefore, it's very important to examine this relationship between
innovation and structural transition in different types of economies. To
distinguish between economies experiencing different development path,
we use World Bank's income classification to divide the sample into low
income, lower middle income, upper middle income and high income
samples. What needs to be noted here is that the World Bank's high income
sample is not equivalent to mature economies as defined by the OECD, in
that the income (measured as per capita GNI) threshold definition for the
World Bank high income sample is 12,736 US dollars. While the figure for
OECD (mature economies) is 44,272 US dollars. This distinction is rather
useful as the non-OECD sample may include some of these high income
countries that are clearly experiencing a different transition path from the
lower income group, hence why we decide to use World Bank's income
classification as it's more detailed than simply dividing countries into two
groups (i.e. OECD and non-OECD).
Table 5 (see Appendix A3) presents results from different econo-
mies. It's quite evident from Columns (1) to (6) that structural transition
matters for innovation in both low income and lower-middle income
economies. However, the magnitude of the impact is much larger in
10
Technological Forecasting & Social Change 159 (2020) 120194
lower middle income economies (Columns (4) to (6)) than in the low
income ones (Columns (1) to (3)). It seems that lower middle income
countries benefit better from their effort of economic structure trans-
formation to gain a boost on innovation. This result should be inter-
preted with caution however, since we have only 3 countries included
in the low income sample.
High income countries (Columns (10) to (12)) are also found to
experience higher impact of structural change on R&D than low income
countries do. The magnitude of these impacts is comparable to those
from the lower middle income economies, however, the direction of
impacts are very different. For lower middle income countries, the key
to spark innovation by changing economic structure, is to shift towards
an industry or service based economy. Whereas for high income
countries, shifting towards industry does not help, in fact, it undermines
their R&D efforts (Column (11)). The key for high income countries
therefore is to shift towards a service based economy. Moreover,
shifting away from an agricultural based economy is more important for
a high income economy (Column (10)) than for a lower middle income
economy (Column (4)). The sign reversal for the coefficients on the
industry sector share for the high income sample potentially explains
the overall ambiguous picture of the role of industry sector in innova-
tion in our global sample. Results from the upper middle income sample
suggest further intriguing insights. The impact of the service sector on
innovation becomes insignificant in these economies. Shifting towards
an industry based economy and away from an agricultural based one is
the key to gain a boost on innovation.
Furthermore, we also report results on the interactive terms be-
tween the income dummies (i.e. low income (LIC), lower-middle in-
come (LMC), upper middle income (UMC) and high income (HIC)) and
the sector shares (i.e. agriculture, industry and service). Doing so enable
us to compare one income group (base group) with the other three
groups by examining the size of the coefficients on the interactive
terms. It should be pointed out though that our first choice of ex-
amining the moderation effect of income on the relationship between
structural change and innovation is still sample splitting, since (1) in-
cluding the interactive terms and the income dummies introduce sig-
nificant amount of multicollinearity between our core variable (sector
shares) and the interactive terms, which causes false insignificance, and
(2) the coefficients on the interactive terms only tells the difference in
the size of the coefficients between the base group and the comparing
groups, however, it doesn't reveal any information on the difference in
the direction of impact.
It's quite evident from Columns (4), (5) and (6) in Table 6 in the
Appendix A4 that our findings in sample splitting is again confirmed in
these regressions with interactive terms. Specifically, compared with the
high income group, the impact of agriculture sector share on innovation is
smaller (i.e. less negative) in low income, lower middle and upper middle
economies, which is suggested by the positive coefficients on “Sagri ×
LIC”, “Sagri × LMC”, and “Sagri × UMC” (i.e. less negative means larger
coefficient, hence the positive coefficient on these interactive terms) in
Column (7). As we have found in sample splitting, compared with the high
income group, the impacts of the industry sector share on innovation are
the opposite in the LMC and UMC economies, and this is again confirmed
by the positive coefficients on “Sind × LMC”, and “Sind × UMC” in
Column (8) (i.e. since the impact of industry sector share on innovation is
negative in the HIC economy, but negative in LMC and UMC economies,
hence the positive coefficients on “Sind × LMC”, and “Sind × UMC”).
Finally, the positive coefficient on “Sserv × HIC” confirms that comparing
with the low income group, the high income group's impact of service
sector share on innovation is greater. The reason why we choose the low
income group as the base group in the service sector interactive term re-
gressions is that the results from sample splitting suggest all other three
income groups have a larger impact of service sector share on innovation
than the low income group.
It's clear from the above analysis that two conclusions can be drawn:
(1) Structural change matters for innovation for all types of economies.
C. Wang and Y. Lu Technological Forecasting & Social Change 159 (2020) 120194

(2) The magnitude and the direction of these impacts differ among
different economies. Low income countries tend to benefit less from
their structural change efforts than all the other three types of econo-
mies do. Shifting away from an agricultural based economy is more
important for high income countries than for lower middle income
economies. While the industry sector promotes innovation in low and
middle income countries, it actually undermines innovation for high
income countries. (3) Overall, different economies need to focus on
developing their specific sectors to gain the benefit of increased in-
novation. For high income, upper middle income, lower middle income,
they are the service sector, industry sector, both industry and service
sectors respectively. The low income countries may have to wait until
their income grow to a certain level (lower middle) before they can gain
substantial amount of innovation return from their structural change
efforts.
Conclusions
In sum, this paper is motivated by the Schumpeter's view on in-
novation and the Kuznets’ retardation theory concerning structural
chagne, this paper attempts to explain the impact of structural change
on innovation. By performing OLS and panel IV regressions with fixed
effects, as well as two-step system GMM estimators, this paper has
found evidence that supports the following:
First, structural change as measured by agriculture, industry and
service sector shares of GDP have significant impacts on innovation (R&
D personnel intensity) in our core global sample comprised of 75 de-
veloped and developing countries. In particular the effect of agriculture
sector on innovation is found negative, while the impact of the service
sectors is found to be positive.
Second, the above effects are robust to alternative measures of
structural change (sector shares of employment) and innovation (R&D
expenditure intensity), alternative instrumental variable (ratio of agri-
cultural land area to total area) and alternative estimation technique
(two-step system GMM) that accounts for endogeneity, suggesting our
core results which utilize a panel IV 2SLS approach are not driven by
the particular core dependent and independent variable we include, nor
has it been influenced by the particular choice of instrumental variable
and estimation technique that accounts for endogeneity that we use.
The results on control variables confirm Levine (2005)’s study on the
positive impact of financial development on innovation, as well as
Galor and Weil (2000), Galor and Moav (2002, 2006), Galor and
Mountford (2003)’s study on the positive impact of human capital on
innovation.
Finally, we are able to identify the above effects in different
economies characterized by income and they differ. In particular,
shifting away from the agriculture sector is found to be important for
more advanced economies, while the industry sector is important for
innovation among upper middle income economies. The low income
economies generally benefit much less from their structural change
efforts than lower middle, upper middle and high income economies
do.
Author bio
The first and second authors are affiliated with Macquarie
University and University of Tasmania respectively, their research areas
include growth and development, institutions, innovation, technolo-
gical change, and corporate finance.

Appendix

A1: Correlation Table

N /L R /Y Sagri Sind Sserv empind empserv empagri HPCA FDPCA open agriland arable

N /L 1
R /Y 0.7517 1
Sagri −0.5087 −0.5082 1
Sind −0.2321 −0.2543 −0.1177 1
Sserv 0.5282 0.5464 −0.559 −0.7576 1
empind 0.1331 0.17 −0.4615 0.2209 0.1191 1
empserv 0.5526 0.4906 −0.8203 −0.0437 0.5756 0.273 1
empagri −0.5021 −0.4611 0.8222 −0.026 −0.5187 −0.4987 −0.9263 1
HPCA 0.5387 0.6242 −0.5458 −0.1454 0.4802 0.2215 0.5371 −0.55 1
FDPCA 0.4901 0.5883 −0.4993 −0.2494 0.5364 0.1424 0.4607 −0.4082 0.4428 1
open 0.1418 0.0309 −0.1605 0.0938 0.0271 0.0868 0.1321 −0.1463 0.1399 0.1308 1
agriland −0.0445 0.0559 0.2022 −0.2843 0.1044 0.1662 −0.3016 0.208 0.1351 −0.0127 −0.0125 1
arable 0.1682 0.1741 −0.0105 −0.1919 0.1672 −0.0484 0.1148 −0.1079 0.2948 −0.01 −0.224 0.0465 1

Notes: see Table 1 notes for variable definition.

A2: Countries in the regressions (largest sample)

Low-income economies: Madagascar, Niger, Togo. Lower-middle income economies: Bolivia, Cote d'Ivoire, Egypt, Honduras, India,
Indonesia, Pakistan, Philippines, Senegal, Sudan, Tunisia, Ukraine, Vietnam, Zambia. Upper-middle-income economies: Argentina, Brazil,
Bulgaria, China, Colombia, Costa Rica, Cuba, Ecuador, Guatemala, Iran, Jordan, Malaysia, Mauritius, Paraguay, Peru, Romania, Russia, Sri Lanka,
South Africa, Turkey, Thailand, Venezuela,. High-income economies: Australia, Austria, Belgium, Brunei, Canada, Chile, Cyprus, Denmark,
Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Korea Rep, Kuwait, Malta, Mexico, Netherlands, New Zealand, Norway,
Panama, Poland, Portugal, Singapore, Spain, Sweden, Switzerland, Taiwan, Trinidad and Tobago, United Kingdom, United States, Uruguay,.
Data Source:
Innovation (N/L, R/Y): UNESCO statistical yearbook; World Bank WDI. Sector shares (Sagri, Sind, Sserv, empagri, empind, empserv): World Bank
national accounts data; OECD national accounts data; International Labour Organization, Key Indicators of the Labour Market database; Gapminder,
http://www.gapminder.org FDPCA: International Monetary Fund, International Financial Statistics and data files, and World Bank and OECD GDP
estimates; Gapminder, http://www.gapminder.org HPCA: Barro and Lee (2013) schooling dataset, World Bank WDI; Gapminder, http://www.
gapminder.org Open: World Bank national accounts data, OECD national accounts data; Gapminder, http://www.gapminder.org Agriculture land
(arable, agriland): Food and Agriculture Organization; Gapminder, http://www.gapminder.org.

11
 C. Wang and Y. Lu

A3: Table 5: The Effect of Structural Change on Innovation in Different Economies

Dependent Variable: N /L
Low Income Lower Middle Income Upper Middle Income High Income
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)

Panel A: 2nd stage results for 2SLS

Sagri −0.001** −0.015*** −0.043*** −0.039***
−0.113** −0.664*** −0.953*** −1.827***
(−2.47) (−5.16) (−4.17) (−2.70)
Sind 0.002** 0.060* 0.051*** −0.020**
0.193** 2.889* 1.394*** −0.066**
(2.55) (1.68) (3.76) (−2.38)
Sserv 0.001** 0.020*** 0.299 0.013***
0.128** 1.048*** 11.072 0.260***
(2.24) (3.02) (0.68) (2.60)
Observations 129 129 129 602 602 602 817 817 817 1548 1548 1548
No. of Countries 3 3 3 14 14 14 19 19 19 36 36 36
Fixed effects Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes

12
Control Variables Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
F (p-value) 7.10 7.61 5.84 27.54 2.92 9.44 19.66 15.98 0.52 202.66 157.56 188.87
(0.000) (0.000) (0.000) (0.000) (0.020) (0.000) (0.000) (0.000) (0.724) (0.000) (0.000) (0.000)
R2 0.15 0.21 0.40 0.05 0.11 0.20 0.002 0.02 0.01 0.26 0.05 0.21
Panel B: 1st stage results for 2SLS
Instrumented RDn RDn RDn RDn RDn RDn RDn RDn RDn RDn RDn RDn
arable 17.697*** −6.394*** −11.316*** 17.761*** −4.498 −13.263*** 17.353*** −14.852*** −2.530 3.706*** 7.147*** −10.852***
(10.19) (−4.86) (−6.83) (7.98) (−1.56) (−3.98) (7.91) (−4.36) (−0.70) (6.45) (5.00) (−7.33)
Under-Identification Test Statistics (p-value) 57.92 20.42 34.85 57.79 2.45 15.51 58.25 18.66 0.50 40.55 24.66 52.01
(0.000) (0.000) (0.000) (0.000) (0.117) (0.000) (0.000) (0.000) (0.480) (0.000) (0.000) (0.000)
F (p-value) 103.78 23.60 46.65 63.65 2.45 15.83 62.53 19.01 0.50 41.56 25.00 53.72
(0.000) (0.000) (0.000) (0.000) (0.118) (0.000) (0.000) (0.000) (0.481) (0.000) (0.000) (0.000)
R2 0.56 0.38 0.33 0.60 0.05 0.29 0.61 0.26 0.43 0.47 0.30 0.50

Notes: The regressions are estimated using the panel IV model with fixed effects. We report standardized coefficients after the non-standardized ones for sector share variables. The year coverage range from 1970 to 2012,
z-values are in the parentheses. The results on control variables are not reported. Based on World Bank definition, Columns (1) to (3) report results from the low income sample, (4) to (6) for the lower middle income
sample, (7) to (9) for the upper middle income sample, (10) to (12) for the high income sample. Due to the fact that there's only one exclusive IV variable Tm (i.e. IV model is exactly identified under the Sargan-Hansen over
identification test), we report the Anderson canon. corr. LM statistic to test whether our IV model is under-identified. The null hypothesis is that the IV model is under-identified. See notes in Tables 1 and 3 for other
information including variable definitions. Significance at the 10%, 5% and 1% levels are indicated by *, ** and ***.
Technological Forecasting & Social Change 159 (2020) 120194
C. Wang and Y. Lu Technological Forecasting & Social Change 159 (2020) 120194

A4: Table 6: Including 2 sector shares at a time, and Including Interactive Terms

Alternative treatment of structural change (including 2 industrial sectors) Alternative treatment of separating samples
Two-step System GMM Two-step System GMM
(1) N /L (2) N /L (3) N /L (4) N /L (5) N /L (6) N /L

L . (N / L ) 0.995*** 0.977*** 1.011*** 1.008*** 1.018*** 0.958***

(37.33) (46.48) (52.03) (79.57) (39.92) (44.08)
Sagri −0.001** −0.001* −0.003*
−0.034** −0.021* −0.079*
(−2.38) (−1.79) (−1.91)
Sind −0.001 −0.000 −0.000
−0.044 −0.014 −0.008
(−1.64) (−1.57) (−0.69)
Sserv 0.000** 0.000** −0.000
0.012** 0.011** −0.006
(2.16) (2.38) (−0.35)
FDPCA 0.000 0.002 −0.001 0.003 −0.003 0.000
(0.01) (0.71) (−0.26) (0.59) (−0.68) (0.13)
HPCA −0.006 −0.004 −0.004 −0.007 −0.004 −0.002
(−0.74) (−1.01) (−0.90) (−1.44) (−1.13) (−0.27)
open 0.000 0.000 −0.000 0.000** 0.000 0.000**
(0.35) (1.40) (−0.72) (2.03) (1.13) (2.41)
LIC −0.023 0.058
−0.013 0.034
(−1.45) (0.86)
LMC −0.022** −0.316* −0.009
−0.026** −0.366* −0.011
(−2.09) (−1.91) (−0.06)
UMC −0.005 −0.074 −0.075
−0.007 −0.095 −0.096
(−0.52) (−1.43) (−0.43)
HIC −0.112
−0.164
(−0.81)
Interactive term (S × LIC) 0.003** −0.003
0.063** −0.029
(1.99) (−1.06)
Interactive term (S × LMC) 0.003** 0.008* −0.001
0.079** 0.286* −0.075
(2.07) (1.78) (−1.31)
Interactive term (S × UMC) 0.002* 0.002** 0.000
0.043* 0.087** 0.018
(1.83) (1.98) (0.17)
Interactive term (S × HIC) 0.001**
0.109**
(2.07)
Observations 3024 3024 3024 3024 3024 3024
No. of Countries 72 72 72 72 72 72
Fixed effects Yes Yes Yes Yes Yes Yes
AR(1) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
AR(2) (0.272) (0.265) (0.305) (0.278) (0.288) (0.253)
Sargan-Hansen test of over-identification (p-value) 26.22 18.72 24.65 41.11 21.80 17.02
(0.124) (0.475) (0.172) (0.221) (0.747) (0.589)
Diff. in Hansen Test (p-value) 8.38 5.77 3.78 6.37 −0.08 1.31
(0.212) (0.449) (0.707) (0.383) (1.000) (0.995)

Notes: The regressions are estimated using the panel OLS with fixed effects, the two-step system GMM estimator, and heteroskedasticity consistent standard errors
We report standardized coefficients after the non-standardized ones for sector share variables. The year coverage range from 1970 to 2012, z-values are in the
parentheses. Columns (1) to (3) report the results of alternative strategy which put two of industrial sectors simultaneously in regressions and alternative measure to
group economies by income level. The “S” in the interactive terms (i.e. S × LIC, S × LMC S × UMC S × HIC) means Sagri , Sind , and sserv in Columns (4), (5) and
(6) respectively. See notes in Tables 1, 3 and 4 for other information including variable definitions. Significance at the 10%, 5% and 1% levels are indicated by *, **
and ***.

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