Growing Knowledge in Developing Countries
For a developing country, catching up with foreign knowledge can be tantamount to a transition from rags to riches, as supported by the historical evidence on the diffusion of the Industrial Revolution to Europe, the United States, and other Western countries. More recently, the same pattern has been seen following the successful adoption of Western technology by Japan, Korea, and China. Inflows of foreign knowledge are key for developing countries to catch up with the world technology frontier.
In his recent paper, published this year in the International Economic Review, economist Alexander Monge-Naranjo constructs a new model to analyze how foreign and domestic firms build knowledge in developing countries. He examines both the incentives for foreign firms to locate in a developing country (bringing their know-how with them) and the incentives for domestic firms to invest in their own know-how.