Investment Demand and Structural Change

• Authors: Manuel García-Santana.
• Econometrica
• International Economics

We study the joint evolution of the sectoral composition and the investmentrate of developing economies. Using panel data for several countries in differentstages of development, we document three novel facts: (a) the share of industryand the investment rate are strongly correlated and follow a hump-shaped profilewith development, (b) investment goods contain more domestic value added fromindustry and less from services than consumption goods do, and (c) the evolutionof the sectoral composition of investment and consumption goods differs from theone of GDP. We build a multi-sector growth model to fit these patterns and providetwo important results. First, the hump-shaped evolution of investment demand ex-plains half of the hump in industry with development. Second, asymmetric sectoralproductivity growth helps explain the decline in the relative price of investmentgoods along the development path, which in turn increases capital accumulationand promotes growth.