IMF Working Papers

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

By Jaedo Choi, Younghun Shim

July 19, 2024

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Format: Chicago

Jaedo Choi, and Younghun Shim. "From Adoption to Innovation: State-Dependent Technology Policy in Developing Countries", IMF Working Papers 2024, 154 (2024), accessed November 21, 2024, https://doi.org/10.5089/9798400281341.001

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

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.

Subject: Economic sectors, Foreign corporations, Production, Productivity, Technology, Technology transfer, Total factor productivity

Keywords: Adoption subsidy, Foreign corporations, Global, Industrial Policy, Innovation, North America, Productivity, Productivity gain, Spillovers from adoption, Strategic Interaction, Technology Adoption, Technology transfer, Total factor productivity, Younghun shim

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