International Knowledge Flows and Economic Performance: A Review of the Evidence

An empirical analysis of the microeconomic links between trade and knowledge diffusion is useful for singling out some of the key predictions of the theory of endogenous growth in open economies. This literature postulates that total factor productivity is higher when trade gives countries access to a wider or more sophisticated range of technologies. The articles reviewed here find considerable evidence that imported technologies raise total factor productivity in importing countries, particularly developing countries and particularly when technologies are acquired by way of imports of intermediate goods. They also provide some support for the argument that exports and foreign direct investment are channels for learning. Although access to foreign technologies has a positive impact on developing countries’ total factor productivity, overall these countries are shown to purchase older and simpler machines than industrial countries. Relative factor and machinery costs and skill and technology endowments affect the choice of imported technologies. However, government attempts to limit or guide the selection of technologies are likely to have a negative effect on growth because they discourage producers from purchasing the most appropriate and efficient machines. Rather, policies aimed at promoting technological development should strengthen the absorptive capacity of importing countries and address the complementarity between human and physical capital in a broader context.