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Fridays Academy: Technology and Growth

Ignacio Hernandez's picture

Based on Raj Nallari and Breda Griffith's lecture notes.

Technology Diffusion and Adoption

Technology has helped economic and social progress since the industrial revolution.  If technology is measured as total factor productivity, it explains much of the differences in both the level and rate of growth of income across countries (e.g. Hall and Jones 1999).  However, if technology is defined as scientific innovation and invention it is almost exclusively an activity of richer countries, with many developing country nationals performing research in frontiers of science in high-income countries (e.g. a large proportion of NASA and Silicon Valley engineers are foreign born).  Technological progress in rest of the world is achieved through the adoption and adaption of pre-existing but new technologies to firms and plant.  For this diffusion to accelerate, openness to trade, foreign direct investment, and domestic investments in human capital is found to be critical.  This discussion leads to the conclusion that technology is both a determinant of incomes and an outcome of rising incomes. 

Older technologies, such as fixed-line telephone, electric power, transportation, and health care services is in high use in low and middle income developing countries, and these services are usually provided by governments because of the large initial investments needed, followed by high maintenance costs and need for high-skilled engineers.  In contrast, newer technologies, such as internet, cell phones, computers etc are cheaper to adopt, easy to maintain and use.  However, technological adoption is very uneven and this creates rural-urban gap as observed in India and most developing countries.

Why is technological diffusion uneven across countries?  Why does rapid diffusion of ideas not remove all, or at least most, cross-country technology differences as envisaged by economic theory? Technology differences and income gaps can remain substantial even with free flow of ideas because technologies of the world technology frontier may be inappropriate to the needs of specific countries. Technologies and skills consist of bundles of complementary attributes that vary across countries.  Over 90% of the world R&D is carried out in OECD economies and technologies developed are more appropriate for conditions, skills-availability,  capital-intensity and other factors in OECD countries (rather than for developing countries), except perhaps in the case of pharmaceuticals to fight against diseases (e.g. HIV drugs) which could be used both in OECD and in developing countries.   Similarly, technologies developed for high capital-intensive production processes in OECD countries may be of little use to labor-abundant less-developed economies.  Differences in human capital skills may be one factor amongst others in technological adoption. 

Productivity differences within firms in a country appear to be related to the entry of new and more productive plants and the exit of less productive plants.  In other words, a process of continuous creative destruction (as advocated by Schumpeter) appears to be one of the stylized facts.   However, available evidence indicates that entry and exit account for only about 25% of average total factor productivity growth, with the remaining 75% is accounted for by continuing plants, where firms regularly invest in technology and productivity.  

A review of empirical evidence on technological adoption by Chandra (2006) concludes that:

(i) latecomers can leapfrog across several stages of development.  Ireland and India appear to be riding on a wave of outsourcing of international business operations, while Taiwan increased  its per capita income 10-fold within 4 decades largely on the back of rapid expansion of electronic exports;

and (ii) technological learning, which involved technological mastery first and technological deepening later, was the key channel of innovation behind their successes. Further, the channels of technology transfer were found to be multi-faceted and included: 

- within firm transfers through FDI (from parent to subsidiaries—e.g. electronics in Malaysia and Taiwan, floriculture in Kenya, Nile perch fisheries in Uganda, and wine in Chile);

- licensing, contracting and sub-contracting because buyers must develop own marketing capabilities. This appears to be a more limited channel;

- technology embodied in capital goods imports;

- formal research and development; and

- harnessing the diaspora to disseminate technological knowledge to local firm
(e.g. Indian software and Taiwanese electronics).


Next Friday: Information and Communication Technology

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