Objective - To examine whether productivity differences across sectors of a small open economy can be explained by observable channels of technology diffusion, particularly business R&D intensity and inward foreign direct investment (FDI).

Methodology - A Cobb–Douglas production function was estimated for ten Latvian sectors using Eurostat data covering 2018–2024. Capital was measured using two independent approaches: consumption of fixed capital and the perpetual inventory method. Because each sector had only seven annual observations, a panel regression was conducted using 70 sector-year observations with sector and year fixed effects. A technology transfer index was constructed from business R&D intensity and inward FDI position, both measured relative to gross value added.

Findings - The estimated output elasticity of capital was 0.40 (standard error 0.10), while the labor elasticity was 0.19 and was not statistically distinguishable from zero. TFP differed substantially across sectors, varying by a factor of 4.7, with finance having the highest TFP, followed by information and communication (ICT) and professional activities. The technology transfer index showed a positive but non-robust relationship with productivity: the linear correlation was 0.65 and statistically significant, whereas the rank correlation of 0.45 was not significant. The observed relationship was largely driven by financial activities, and the findings indicate association rather than causality. The policy constraint identified was the absorptive capacity of sheltered sectors rather than frontier research.

Novelty - The study contributes to the literature by providing comparable productivity parameters for ten Latvian sectors using two independent measures of capital, covering the period 2018–2024, and constructing a technology transfer index entirely from publicly available statistics. It also highlights absorptive capacity in sheltered sectors as a key constraint to technology diffusion.

Type of Paper - Empirical

Keywords: Cobb–Douglas production function, TFP, technology transfer, sectoral analysis.

JEL Classification: D24, O33, O47, O52

URI: https://gatrenterprise.com/GATRJournals/JBER/vol11.2_2.html

DOI: https://doi.org/10.35609/jber.2026.11.2(2)

Pages 125–143