When property rights are enforced internationally, firms in the North have more incentive to develop technologies suited to the South, and output per worker differences decline. However, each less developed country individually benefits from not enforcing these rights, creating a potential for a classic Prisoner’s Dilemma.
Finally, our theory suggests a stylized pattern of cross-country convergence in productivity and GDP. A less developed country diverges from the technological leader when it chooses to use local technologies for which there is no (or little) R&D, but eventually cross-country productivity and income differences tend to become stable as the LDCs start importing the technologies developed in the North. On the other hand, productivity (and income) convergence occurs when a country improves its skill base relative to the North, which concurs with the experiences of Korea and Japan (see for example, Rhee, Ross-Larson and Pursell, 1984; Lockwood, 1968).
The two building blocks of our approach, that most technologies are developed in the North and that these technologies are designed for the needs of these richer economies (directed technical change), appear plausible. For example, over 90% of the R&D expenditure in the world is carried on in the OECD, and over 35% is in the U.S..
Moreover, many recent technologies developed in the North appear to be highly skill-complementary and substitute skilled workers for tasks previously performed by the unskilled (e.g. Katz and Murphy, 1992; Berman, Bound and Machin, 1998). So it should perhaps not be surprising that there are many examples of developing countries, abundant in unskilled workers, which adopt labor-saving technologies requiring specialized technical skills. This has led many development economists, like Frances Stewart (1977, p. xii), to conclude that “…the technology Third World countries get from rich countries is inappropriate”, which is consistent with the approach in this paper.
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A number of other papers have emphasized the difficulties in adapting advanced technologies to the needs of the LDCs. Evanson and Westphal (1995) suggest that new technologies require a large amount of tacit knowledge, which cannot be transferred, slowing down the process of technological convergence. The importance of “appropriateness” of technology has also received some attention, for example Salter (1966), Atkinson and Stiglitz (1969) and David (1974). Diwan and Rodrik (1991) use some of the insights of this literature to discuss the incentives of Southern countries to enforce intellectual property rights, as we do in Section V.
An important recent contribution to the appropriate technology literature is Basu and Weil (1998), who adopt the formulation of Atkinson and Stiglitz whereby technological change takes the form of learning-by-doing and influences productivity at the capital labor ratio currently in use (see also Temple, 1998). Basu and Weil characterize the equilibrium in a two-country world where the less advanced economy receives productivity gains from the improvements in the more advanced economy. Our paper differs from Basu and Weil, in particular, and the rest of the appropriate technology literature, in general, in a number of ways. First, what matters in our theory is not capital-labor ratios (as in Atkinson and Stiglitz and Basu and Weil) or size of plants (as in Stewart), but relative supplies of skills, which we believe to be more important in practice.