Globalisation and technological convergence in the EU

We employ a two‐step approach in investigating the dynamic transmission channels under which globalization factors foster technical efficiency by combining a dynamic efficiency analysis in the stochastic frontier framework, and a time series approach based on VAR and spectral analysis. Using the dataset of the 18 EU countries over 1970–2004, we find that both import and FDI are significant factors in spreading efficiency externalities and thus accelerating technology catch‐up in the EU. In particular, the impacts of the import are more prominent in the short‐run while those of FDI play a more important role over the longer‐run. Furthermore, the impacts of the import are pro‐cyclical only in the short‐run whereas those of FDI are pro‐cyclical mostly over the medium‐ to the long‐run. This evidence is broadly consistent with the sample observation that the recent slowdown of the EU productivity has been closely related to the corresponding FDI decline especially after 2000. Hence, any protection‐oriented policy will be likely to be more detrimental for the EU.