Technological Transfers, Limited Commitment and Growth

This paper examines the effect on economic growth and welfare of the access to external financing which results in technological transfers to a developing country from the rest of the world. We consider a two-sector stochastic growth model and compute optimal accumulation mechanisms in the environments which differ in the extent to which the borrowing contracts are enforced. Furthermore, we examine different assumptions concerning the default punishment and their implications for growth, welfare and borrowing patterns. We show that under limited commitment lack of technological transfers may result in scarce capital flows to developing countries and substantially reduce their growth opportunities. Presence of technological transfers in this environment induces a developing country to use foreign capital to both smooth consumption and invest more heavily in all the sectors of the economy including those unaffected by the productivity benefits. Our findings suggest that technological transfers may play a role of an important enforcement mechanism. In addition, our model can account for the rich structure of observed capital flows to low- and middle income countries