Weightless Machines and Costless Knowledge : An Empirical Analysis of Trade and Technology Diffusion

Knowledge, lacking weight and other physical attributes and being intangible, is a hidden factor of production, making economies grow "weightless." But knowledge is also embedded in technology. If, because of low productivity, poor countries keep buying low-technology machines, will they remain stuck in a low-technology, low-growth trap? Barba Navaretti and Soloaga examine the impact on productivity of technologies imported by a sample of developing and transition economies in Central and Eastern Europe and the Southern Mediterranean economies becoming increasingly integrated with the European Union. They depart from earlier studies of technology diffusion by focusing on the technology embodied in the machines imported. Earlier work focused mostly on spillovers from foreign research and development conveyed through trade, without controlling for the characteristics of the goods imported. The authors jointly estimate the choice of foreign technology and its impact on domestic productivity for a set of manufacturing sectors. They proxy the technological level of the machines imported by using an index relating the unit value of the machines imported by a given country to the unit value of similar machines imported by the United States. At any point in time between 1989 and 1997, there is a persistent (even increasing) gap between the unit values of the machines imported by the United States and those imported by the sample of developing countries. Although developing economies buy increasingly productive machines, the technology embodied in the machines persistently lags behind that in the machines purchased by the United States so far as unit values are good proxies of embodied technologies. Barba Navaretti and Soloaga also find that productivity growth in manufacturing depends on the types of machines imported in a given industry. So although the optimal choice for developing countries is to buy cheaper, less sophisticated machines, given local skills and factor prices, this choice has a cost in long-run productivity growth. If productivity is low, countries buy low- technology machines, but doing so keeps them in a low-technology, low-growth trap. This paper a product of Trade, Development Research Group is part of a larger effort in the group to assess the role of trade in technology diffusion