Exporting, externalities, and technology transfer

Developed-country purchasers of exports from developing-country industrial firms have often provided considerable technical aid to the exporting firms. Some question the benefits to both OECD and developing country firms of such transfers. The authors developed a model to analyze the implications of diffusion of the transferred technology to other developing country firms and the impact of the market entry of additional firms. Surprisingly, diffusion upstream combined with entry downstream may increase the profits of both the OECD importer and its initial developing-country supplier because the diffusion increases competition both upstream and downstream. The intuition isthat a firm does not necessarily lose from competition in its market so long as its buyer/supplier is also forced to behave more competitively as a result of diffusion. A limited amount of increased competition at both stages moves the two firms closer to a vertically integrated firm.