Technological sanctions and their unintended consequences: Theory and evidence

Abstract

We extend Melitz's (2003) model to demonstrate that technology sanctions can lead to unintended economic consequences when targeting countries with substantial technology stocks. Rather than hindering the sanctioned country's technological progress, sanctions may facilitate the emerge of high-productivity domestic firms that outpace international competitors, ultimately boosting the sanctioned country's overall productivity. Our empirical analysis, using the Panel Smooth Transition Regression (PSTR) model, reveals that when a sanctioned country's technology stock reaches approximately 75 % of the sanctioning country's level, the negative impact of sanctions diminishes, potentially resulting in counterproductive outcomes. Additionally, countries with larger populations demonstrate greater resilience to technology sanctions.