The role of public policies in fostering innovation and growth: Theory and empirical evidence

Abstract

This survey outlines the literature on economic growth and development with respect to the following questions: (a) To what extent do public policies influence economic growth? (b) Which policy mix might optimize a country’s rate of growth and development? While the importance of identifying the key determinants of economic growth is obvious, a unified theory that matches empirical facts is still missing. It is shown that a successful theory needs to explain why some countries catch up in terms of productivity while others lag behind. This literature review demonstrates that public policies influence a country’s productivity growth rate in several different ways. However, it also demonstrates that policy effects are often far from obvious ex ante. Instead, some detailed knowledge of the stage of developments or country-specific characteristics are necessary to achieve the desired outcomes.