Openness and Human Capital as Sources of Productivity Growth: An Empirical Investigation CSAE WPS/2003-06 Måns Söderbom and Francis Teal* Centre for the Study of African Economies Department of Economics, University of Oxford May 2003 Abstract Do openness to trade and higher levels of human capital promote faster productivity growth? That they do is a key implication of several versions of endogenous growth theory. To answer the question we use panel data on 93 countries spanning the 1970-2000 period. Controlling for fixed effects as well as endogeneity, the results show a significant effect of openness on productivity growth. If the level of openness of an economy is doubled the underlying rate of technical progress will increase by 0.8 per cent per annum. We find an effect, significant at the ten per cent level, of the level of human capital on the level of income but no effect on underlying productivity growth. Our preferred estimator combines high and low frequency differences of the data. We discuss reasons why this estimator is well suited for empirical analysis of economic growth. JEL classification: F43, O11. Keywords: Productivity, openness, human capital, growth, panel data. An early version of this paper was part of a project funded by the Department for International Development of the UK government on the role of education in reducing poverty. We would like to thank Adrian Wood for comments on an earlier version of this paper. The CSAE is funded by the Economic and Social Research Council of the UK. * Corresponding author: Francis Teal, Centre for the Study of African Economies, Department of Economics, University of Oxford, Manor Road Building, Oxford OX1 3UQ, UK. Tel.: +44 (0)1865 271077; fax: +44 (0)1865 281447; e-mail: Francis.Teal@economics.oxford.ac.uk.