Academic journal article Contemporary Economic Policy

Is North-South Trade-Related Technology Diffusion Regional?

Academic journal article Contemporary Economic Policy

Is North-South Trade-Related Technology Diffusion Regional?

Article excerpt

I. INTRODUCTION

Grossman and Helpman (1991) state that a country's economic growth increases with its trade volume, as imports embed producing countries' technological level--say, measured by research and development (R&D)--and therefore, countries could get access to others' technology through imports of intermediate inputs. Since the early 1990s, some developing countries have pursued regional trade agreements (RTAs) with R&D-rich developed countries. Doing so gives them preferential access to the markets in developed countries, which in turn increases their trade volume of imports and exports. (1) The World Bank (2000) argues that countries can obtain dynamic gains from opening up their economies because it enables them to increase the absorption of technological knowledge developed elsewhere and that this results in increased productivity growth. Given that trade liberalization is often not unilateral (2) and that trade negotiations are costly, it is to the best interests of developing countries to form RTAs with Organization for Economic Co-operation and Development (OECD) countries from which their productivity gains the most.

This article examines the effects of technology diffusion on total factor productivity (TFP) at the industry level for developing countries (the south) from trade with developed OECD countries (the north) and whether north-south trade-related technology diffusion has a regional dimension. Industry-level analysis allows us to study not only international but also interindustry technology spillovers and at the same time avoids potential problems caused by aggregation. Regional dimension means whether there are differential effects of trade on TFP in a developing country with various geographic OECD partners in the north. (3) As found in Keller (2002a), international technology diffusion tends to decline with distance.

The analysis here builds on a rich literature, which examines trade-related technology diffusion. Coe and Helpman (1995) test the Grossman and Helpman (1991) model using a sample of 20 OECD countries plus Israel and find that a country's TFP increases not only with its own R&D stocks but also with its trading partners'. The seminal work has inspired a series of empirical research (Engelbrecht, 1997; Falvey, Foster, and Greenaway, 2002; Lichtenberg and van Pottelsberghe de la Potterie, 1998; Lumenga-Neso, Olarreaga, and Schiff, 2005). All the above articles tend to confirm the findings in Coe and Helpman (1995). (4) The literature further examines north-south trade-related technology diffusion and finds that north-south trade-related technology diffusion is also substantial. At the country-level analysis, see Coe, Helpman, and Hoffmaister (1997), Engelbrecht (2002), and Falvey, Foster, and Greenaway, (2005). At the industry level, Keller (2000, 2002b) reports significant trade-related technology diffusion among eight OECD countries; Schiff, Wang, and Olarreaga (2002) and Schiff and Wang (2006) show that north-south and south-south trade is significant in improving TFP in the south.

This article contributes to the technology diffusion literature by examining whether north-south trade-related technology diffusion has a regional dimension. Unlike Schiff and Wang (2006) who use a pooled data to study the "total" effects of north-south trade-related technology diffusion, the main interest here is to examine whether there is a regional dimension on north-south trade-related technology diffusion. In other words, the focus here is to see whether there are differential effects of trade on technology diffusion among various trading partners grouped by their geographic locations for each developing country. To do so, we divide a developing country's rich OECD trading partners into three groups, namely Japan, Canada plus the United States (North America, denoted by "NA"), and the European Union (EU) (5) and then examine their respective impact on each southern country's TFP in the manufacturing sector through trade. …

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