Technology Policies and Learning with Imperfect Governance

Developing countries can grow rapidly by absorbing known technologies from more advanced countries. Yet developing countries often find it difficult to absorb even relatively simple technologies even when they have the resources to buy the relevant machines and have workers with the appropriate levels of formal education who are willing to work for relatively low wages. The reasons are often contracting problems that prevent critical investments being organized. A number of potentially relevant contracting failures are well known but a particularly important one is underempha- sized. Developing countries typically lack the organizational and technological capabilities embedded in firms that are necessary for using new technologies to produce competitive products. Building organizations that can competitively use the new technologies is a difficult task that is subject to significant contracting failures. Developing the appropriate organizational capabilities involves the exertion of significant effort in the acquisition of tacit knowledge, a process that is difficult to observe and control. This exposes financiers to significant contracting risks that can result in non-investment or the failure to achieve competitiveness. In general, solutions to contracting failures require properly designed corrective policies and appropriate governance capabilities on the part of the state. Developing countries typically have limited governance capabilities and limited potential of developing these capabilities in every direction.