Socially optimal North–South capital transfer and technology diffusion

Abstract

We study North–South capital transfer and the diffusion of embodied technologies within a framework of intertemporal global welfare maximization. We show saddle path stability and characterize the steady state. We then examine the transition path by running numerical experiments based on realistic data. As a result, technology diffusion will succeed if the absorptive capacity is sufficient which requires sufficient investment. While a large share of capital is allocated to the South in early periods, this share declines in later periods when the South has caught up in terms of technologies.

Keywords:

• technology diffusion
• technology transfer
• capital mobility
• human capital
• absorptive capacity
• optimal control

JEL Classifications:

• F21
• O11
• O33
• O47

Acknowledgements

We thank the Leibniz Association (WGL) for its supportand an anonymous reviewer for helpful comments.

Notes

1. According to Lucas (1990) the marginal product of capital in India is theoretically about 58 times higher than the marginal product of capital in the USA. The resulting large international difference in returns to capital investment is expected to lead to an immediate capital flow from the USA to India. Lucas asks why this simple calculation is obviously misleading. To answer this question, the literature names differences in the fundamentals of economies and capital market imperfections as main reasons (Alfaro et al. 2005).

2. We assume equal depreciation rates of physical and human capital. Moreover, we assume equal depreciation rates for North and South. These rates differ in general in reality. It is nevertheless difficult to make an econometrically clear decision: In a one-sector growth model capital includes various forms of capital, and the composition of capital differs across regions. Additionally, in our model human capital is interpreted in a broader sense such that it includes various factors that foster the diffusion and the absorption of knowledge. Therefore, we assume equal depreciation rates for mathematical convenience and clarity and because of a lack of precisely applicable data. It is of course open to the reader to suppose different indices of δ for K, H and D as well as for n and s.

3. This can be seen by choosing a typical utility and production function and sketching their graphs.

4.  http://www.gams.com/. The model is written in discrete time form and solved by maximizing the objective given the model constraints.

5.  https://www.gtap.agecon.purdue.edu/

6. The 33 member countries of OECD in 2010 are: Australia, Austria, Belgium, Canada, Chile, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Israel, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, Slovak Republic, Slovenia, Spain, Sweden, Switzerland, Turkey, United Kingdom, United States.