Working Paper: NBER ID: w21844
Authors: Francisco J. Buera; Ezra Oberfield
Abstract: We provide a tractable theory of innovation and technology diffusion to explore the role of international trade in the process of development. We model innovation and diffusion as a process involving the combination of new ideas with insights from other industries or countries. We provide conditions under which each country's equilibrium frontier of knowledge converges to a Frechet distribution, and derive a system of differential equations describing the evolution of the scale parameters of these distributions, i.e., countries' stocks of knowledge. In particular, the growth of a country's stock of knowledge depends only on its trade shares and the stocks of knowledge of its trading partners. We use the framework to quantify the contribution of bilateral trade costs to cross-sectional TFP differences, long-run changes in TFP, and individual post-war growth miracles.
Keywords: Innovation; Technology Diffusion; International Trade; Economic Growth
JEL Codes: F1; F43; O33; O47
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| The growth of a country's stock of knowledge (O49) | Trade shares (G12) |
| The growth of a country's stock of knowledge (O49) | Knowledge stocks of trading partners (F10) |
| Trade openness (F43) | Quality of insights drawn by producers (L15) |
| Quality of insights drawn by producers (L15) | Productivity of new ideas (O36) |
| Trade barriers (F14) | Access to productive foreign insights (O36) |
| Reduction of trade barriers (F13) | Dynamic gains from trade (F11) |
| Trade liberalization process (F13) | Instantaneous jump in real income (F61) |
| Trade liberalization process (F13) | Gradual improvements in the stock of knowledge (D83) |
| Insights drawn from foreign sellers (F10) | Speed of convergence in knowledge growth (O47) |
| Insights drawn from domestic producers (L11) | Speed of convergence in knowledge growth (O47) |