IMF Working Papers

From Adoption to Innovation: State-Dependent Technology Policy in Developing Countries

Author/Editor:

Jaedo Choi ; Younghun Shim

Publication Date:

July 19, 2024

Electronic Access:

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Summary:

Should policymakers in developing countries prioritize foreign technology adoption over domestic innovation? How might this depend on development stages? Using historical technology transfer data from Korea, we find that greater productivity gaps with foreign firms correlate with faster productivity growth after adoption, despite lower fees. Furthermore, non-adopters increased patent citations to foreign sellers, suggesting knowledge spillovers. Motivated by these findings, we build a two-country growth model with innovation and adoption. As the gaps narrow, productivity gains and spillovers from adoption diminish and foreign sellers strategically raise fees due to intensified competition, which renders adoption subsidies less effective. Korea’s shift from adoption to innovation subsidies substantially contributed to growth and welfare. We also explore the optimal policy and its interaction with import tariffs.

Series:

Working Paper No. 2024/154

Subject:

Economic sectors Financial sector policy and analysis Foreign corporations Production Productivity Spillovers Tax allowances Taxes Technology Technology transfer Total factor productivity

Frequency:

regular