North-South Technological Diffusion: A New Case for Dynamic Gains from Trade

The transitional dynamics for both a developed and a less developed country are derived when North-South trade leads to technological diffusion through reverse engineering of intermediate goods in a quality ladder model of endogenous growth. Domestic technological progress occurs via innovation or imitation, while growth is driven by technological advances in the quality of domestically available inputs, regardless of country of origin. The concept of learning-to-learn is incorporated into both imitative and innovative processes. International trade with imitation leads to feedback effects between Southern imitators and Northern innovators who compete for the world market. Hence, both countries face transition paths dependent on the relative technologies in the two countries. For reasonable parameter values, the rates of innovation and imitation are both falling in transition to steady-state and yet remain above that under autarky. Increased interaction between the North and the South, through increased openness to imports of Northern intermediate goods, leads to higher world growth, demonstrating dynamic benefits to the South of increased trade with a more developed country. The transition to steady-state in which the rate of innovation in the developed country falls as the developing country reduces the technology gap between the two countries may explain the apparent recent slowdown of total factor productivity growth in OECD countries over the last 30 years.