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Technological Absorptive Capacity and Development Stage: Disentangling Barriers to Riches

Abstract: Adoption of better technologies is a crucial way for developing countries to close productivity gaps between them and leading economies. However, the possibility of growing through adoption depends decisively on the country’s absorptive capacity. We build a theoretical model of technology adoption that focuses on four factors that shape the countries’ absorptive capacity, namely: i) years of education; ii) quality of the educational system; iii) barriers that impede the entry and exit of firms; and iv) the technological infrastructure that enhances or impedes the diffusion of new technologies. We calibrate the model for a sample of 86 economies. The United States is our benchmark leading economy. We disentangle the relative weight of each development factor in explaining per capita income differences and study patterns in relationships between the type of development barrier and the level of development. Our results show that in relative terms, years of education and quality of the education system along with high barriers to opening new firms are the main impediments that middle to high-income economies face in closing the gap with the United States. Education as whole (quality plus years of education) explains 50\% of the gap for high-income countries with the United States while the entry costs account for nearly 25\% of this gap. A remarkable result is the small effect that individual reforms have on steady-state productivity in low-income countries. With the exception of technological infrastructure, the remaining three factors are individually responsible for less than 15\% of the gap. This result is explained by poor global absorptive capacity that reduces the effect of each factor when implemented individually. In fact, there are significant nonlinearities between the level of development and the effects of individual reforms, which are due to the strong complementarities between the different development factors.

 

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