Externalities of Investment and Endogenous Growth: Theory and Time Series Evidence∗

In the paper we present and estimate an endogenous growth model in which sustained per capita growth is the result of positive externalities of investment in physical capital. In contrast to the usual assumption that investment raises physical capital and, as a by-product, a stock of knowledge one for one, we suppose a different framework. So, we treat physical and human capital as two distinct variables and underline the importance of the stock of knowledge per physical capital as to the growth performance of countries. Estimation of that model for France, Germany and Japan shows that it is compatible with empirical data. For Great Britain the model performs poor and for the USA it does not produce reasonable outcomes at all. One conclusion we draw from our studies is that an endogenous growth model with positive externalities of investment is of empirical relevance. However, the growth process is also determined by country specific factors such that cross-countries studies should be considered with some care