Exporting, Externalities, and Technology Transfer

Vertical international technology transfer may differ substantially from the horizontal technology transfer emphasized in the literature. In this model, a downstream firm benefits from the diffusion of knowledge it transfers to a developing country firm because diffusion increases demand for its services. 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.Pack and Saggi 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 is that 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.This paper - a product of Public Economics, Development Research Group - is part of a larger effort in the group to analyze the impact of public policy on growth rates