Avoiding the trap: The dynamic interaction of North–South capital mobility and technology diffusion

Abstract

This paper analyzes a stylized model of international capital mobility and diffusion of embodied technologies from North to South. The South can fall behind in terms of technologies or get trapped in a situation in which it is unable to attract foreign capital and embodied technologies if it is too far away from the technology frontier and if its absorptive capacity is too low. The paper reconciles the view that technological catching up is stronger the larger the technology gap with the alternative view that technological catching up is strongest at a medium technology gap. The closer the South is to the technology frontier the more beneficial is a higher income share of foreign capital.