Explaining differences in the productivity of investment across countries in the context of ‘new growth theory’

The purpose of this paper is to explain differences in the productivity of investment across 84 rich and poor countries over the period 1980–2011, and to test the orthodox neoclassical assumption of diminishing returns to capital. The productivity of investment is measured as the ratio of the long-run growth of GDP to a country’s gross investment ratio. Twenty potential determinants are considered using a general-to-specific model selection algorithm. Education, government consumption, geography, export growth, openness, political rights and macroeconomic instability are the most important variables. The data also suggest constant returns to capital, so investment and the determinants of productivity of investment differences matter for long-run growth.