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

Abstract

: Should governments in developing countries support technology adoption or promote innovation? And how does the answer change over different stages of development? To answer these questions, we digitize the universe of technology transfer contracts between domestic and foreign firms in South Korea during its growth miracle period, which has novel information on the price of technologies. We find that, when the productivity gap between domestic and foreign firms is small, 1) the adoption fee is high, 2) the productivity growth from adoption is smaller than that from innovation, 3) firms are more likely to invest in innovation than adoption. Motivated by these findings, we build a two-country growth model with endogenous adoption and innovation decisions. Foreign firms can sell technologies for an endogenous fee, internalizing the future loss of profit due to stronger competition with domestic firms. The productivity gains from adoption and innovation depend on the productivity gap with foreign firms, which makes the effects of adoption and innovation subsidies also vary with the gap. We estimate the model and quantitatively investigate the effect of several policies along the transitional dynamics. We evaluate Korea's technology policies since 1973, which started with an adoption subsidy and shifted to an innovation subsidy as the productivity of Korean firms converged with that of international competitors. Our result suggests that this state-dependent policy increased consumption-equivalent welfare by 4.84%, which is more than subsidizing only innovation or adoption throughout. Furthermore, it was optimal to switch from an adoption subsidy to an innovation subsidy in 1985 when Korea's GDP reached 55% of Japan's. Abstract: This paper develops a measure of Capital-Embodied Innovation (CEI). The measure counts the number of patents applied to different capital goods by matching patent descriptions from the USPTO to capital goods descriptions from Wikipedia. Using occupation-level variations on the sets of capital goods from O*NET, we document that the CEI measure is smaller for routine occupations. Furthermore, we highlight the heterogeneous effects of CEI across the capital good-occupation relationship. When the capital good performs the same function as the occupational task (task-substituting capital), the CEI on Abstract: We study how the adoption of foreign technology and local spillovers from such adoption contributed to late industrialization in a developing country during the postwar period. Using novel historical firm-level data for South Korea, we provide three empirical findings: direct productivity gains to adopters, local productivity spillovers of the adoption, and complementarity in firms' adoption decisions. Based on these findings, we develop a dynamic spatial model with firms' technology adoption decisions and local spillovers. The spillovers induce dynamic complementarity in firms' technology adoption decisions. Because of this complementarity, the model potentially features multiple steady states. Temporary adoption subsidies can have permanent effects by moving an economy to a new transition path that converges to a higher-productivity steady state. We calibrate our model to the microdata and econometric estimates. We evaluate the effects of the South Korean government policy that temporarily provided adoption subsidies to heavy manufacturing firms in the 1970s. Had no adoption subsidies been provided, South Korea would have converged to a less industrialized steady state in which the heavy manufacturing sector’s share of GDP would have been 15 percentage points lower and aggregate welfare would have been 10% lower compared to the steady state with successful industrialization. Thus, temporary subsidies for technology adoption had permanent effects.