Technology gaps, trade and income

What is this research about and why did you do it?

How important is innovation in determining cross-country income inequality? More innovative firms and countries use better technologies, but the size of international technology gaps depends upon the rate of international knowledge diffusion. When diffusion is fast, the technology gap between innovators and imitators is small, whereas slow diffusion leads to large technology gaps.  This research studies the origins and consequences of technology gaps. How do innovation and knowledge diffusion determine the size of technology gaps? And what fraction of cross-country income differences are accounted for by technology gaps? Addressing these questions provides new evidence on why some countries are richer than others.

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How did you answer this question?

The paper develops and estimates a quantitative model of innovation and adoption in open economies. Crucially, it shows that the size of technology gaps can be measured by combining data on how much countries innovate with information on bilateral trade flows. More innovative countries have a comparative advantage in more innovation-dependent industries. Consequently, the magnitude of equilibrium technology gaps can be inferred by estimating the effect of innovation on comparative advantage. In contrast to previous development accounting research that obtains productivity indirectly using the Solow residual, this approach provides a direct measure of technology differences across industries and countries.

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What did you find?

Technology gaps account for an important share of international income differences. The figure below plots how the wages and income per capita of OECD countries (relative to the United States) would change in a world without technology gaps caused by differences in innovation. It shows that poorer countries benefit in relative terms, leading to a decline in international inequality. Nominal wages relative to the United States increase by around 20 percent on average. The results imply that technology gaps account for one-quarter to one-third of nominal wage dispersion within the OECD and around 15 percent of dispersion in real income per capita.

Counterfactual changes in log nominal wages and log real income per capita by country plotted against observed values in 2012. Counterfactual eliminates technology gaps due to differences in innovativeness. All variables normalized to zero for the United States.

Source: Sampson (2023).

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What implications does this have for the study (research and teaching) of wealth concentration or economic inequality?

Understanding the origins of cross-country differences in income inequality is one of the central concerns of economies. This research provides new evidence on how a country’s innovativeness affects its relative standard of living. The findings highlight the importance of studying why some countries are more innovative than others and which policies encourage innovation. At the same time, it shows that other determinants – such as factor endowments and allocative efficiency – account for the majority of cross-country income variation.

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What are the next steps in your agenda?

My next project studies how differences in innovativeness across countries affect the optimal strength of patent protection. Should all countries provide similar patent rights, or does it make sense for poorer, less innovative countries to offer weaker protection?

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Citation

Sampson, T. (2023). "Technology Gaps, Trade, and Income." American Economic Review, 113 (2), pp472-513.

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