Friday, November 9, 2012

The missing North-South flow of technology

Why doesn't technology flow from rich to poor countries? This question means that countries should be adopting the best technologies for their circumstances such as their factor endowmnets. Yet, this does not seem to happen. One striking example is that India, despite being abundant in labor, does not adopt manufacturing methods that would utilize large plants with lots of workers. This question is possibly related to the one why capital does not flow from rich to poor countries. This is because adopting technologies may imply significant investments that need to come from abroad.

Harold Cole, Jeremy Greenwood and Juan Sanchez think this has all to do with the efficiency of the financial system. Investors have more limited information than developers (who may also misappropriate funds), and financial institutions are supposed to bridge that information gap and monitor developers. Concretely, they model firms as located on a productivity ladder, and this location is private information and changes stochastically, the stochastic schedule being a choice of the developer. Financial intermediaries offer dynamic contracts that reward good outcomes but acknowledge that there is a costly state verification problem. The intermediary can pick the probability of audit and this is where financial development enters: audits are more efficient and less costly in some countries. If a country is rather backward in this regard, financial intermediaries have a hard time figuring out where the developers stand, and thus cannot reward them appropriately. The best effort to get the best technologies then does not happen, and this because the feasible set of technologies is reduced. Have more efficient audits, and more is invested more confidently towards better productivity schedules. And as I reported a few days ago, once these reforms are adopted, the country may actually need less foreign capital than before.

1 comment:

Anonymous said...

Hal Cole is a genious!