NBER WORKING PAPER SERIES

INTERNATIONAL TECHNOLOGY DIFFUSION

Wolfgang Keller

Working Paper 8573

http://www.nber.org/papers/w8573

NATIONAL BUREAU OF ECONOMIC RESEARCH

1050 Massachusetts Avenue
Cambridge, MA 02138
October 2001

I would like to thank Sourafel Girma for providing some regression results. I have also benefited from
conversations with Bob Baldwin and Elhanan Helpman, as well as from comments by Sam Kortum and
Maurice Schiff. The views expressed herein are those of the authors and not necessarily those of the National
Bureau of Economic Research.

© 2001 by Wolfgang Keller. All rights reserved. Short sections of text, not to exceed two paragraphs, may
be quoted without explicit permission provided that full credit, including © notice, is given to the source.
International Technology Diffusion
Wolfgang Keller
NBER Working Paper No. 8573
October 2001
JEL No. F1, F2, O3, O4

ABSTRACT

I discuss the concept and empirical importance of international technology diffusion from the
point of view of recent work on endogenous technological change. In this literature, technology is viewed
as technological knowledge. I first review the major concepts, and how international technology diffusion
relates to other factors affecting economic growth in open economies. The following main section of the
paper provides a review of recent empirical results on (i) basic results in international technology
diffusion; (ii) the importance of specific channels of diffusion, in particular trade and foreign direct
investment; (iii) the spatial distribution of technological knowledge, and (iv) other issues.

Wolfgang Keller
Department of Economics
University of Texas
BRB 3.152
Austin, TX 78712
and NBER
keller@eco.utexas.edu
1. Introduction

Technology is important in explaining income levels across countries. The

accumulation of physical and human capital matters as well, but that cannot

explain much of today’s cross-country incomes differences (Easterly and Levine

2001, Prescott 1988). If the rate of technical change differs across countries, this

affects the world’s distribution of income. New information and communication

technologies (ICTs) have been developed relatively fast in the United States

(U.S.), for example, and this might explain why the U.S.’ lead in per capita

income over Japan has increased from 10% in 1990 to 20% by 1999.

Recent work has shown, however, that the major sources of technical

change leading to productivity growth in OECD countries are not domestic;

instead, they lie abroad (Eaton and Kortum 1999, Keller 2001a).2 The

international diffusion of technology is therefore a major determinant of per-

capita income in the world. Because most developing countries spend relatively

less on basic science and innovations—formal R&D spending, for instance, is

highly concentrated in a handful of OECD countries—poorer countries rely even

more on foreign sources of productivity growth than OECD countries do.

This means that convergence in income turns on the degree of

international technology diffusion. Strong diffusion is a force towards

convergence, because it equalizes differences in technology across countries.

Conversely, the absence of international technology diffusion favors divergence.

Technical change in the presence of non-uniform international technology

2Eaton and Kortum (1999) estimate for example that foreign research accounts for 87% of
productivity growth in France (Table 5). See section 3 for further results.

2
diffusion is at the heart of the recent ''digital divide'' discussion, for example--the

widespread fear that the development of the Internet might not lead to

convergence, but instead to a further polarization of the world’s income

distribution.

While it has been recognized since the classic ‘Solow residual’ paper

(Solow 1957) that rates of factor accumulation do not account for the major part

of economic growth, the view that technological change has both domestic and

foreign sources is less common. Arguably, the rapidly rising level of economic

integration in the late 20th century, fostered by advances in transportation as well

as in information and communication technology, makes the exclusive focus on

domestic technological change obsolete. Sometimes the reason for productivity

increases does indeed lie in purely domestic activities, such as the learning effects

resulting from cumulative production for domestic demand. However,

productivity also increases due to learning through the interaction between

foreign and domestic firms. The greater importance of technology adoption from

abroad--versus domestic technical change--in less developed compared with

more developed countries suggests that learning through international economic

activity might be particularly important for less developed countries.

This paper takes a look at the evidence to expand on these ideas. In the

next section, I discuss the concept of international technology diffusion. I also

provide some references to the underlying theories; the sections that follow are

first and foremost a review of recent empirical work. Basic results on

international technology diffusion are discussed in section 3. Section 4 is devoted

to international trade, foreign direct investment, and other channels of diffusion.

3
In section 5, I review the evidence on the heterogeneity of diffusion across

products and industries. Section 6 discusses findings on the geographic

localization of international technology diffusion, and section 7 examines how

this has changed over time. In section 8 I discuss some evidence on major

country-specific determinants for successful international technology diffusion.

Finally, section 9 summarizes the major findings, suggests directions for future

research, and discusses policy implications.

2. Conceptual issues

International technology diffusion in this paper

It is central to much of the recent work to view technology as knowledge, as

emphasized in the theories of endogenous technical change that emerged about

ten years ago (Aghion and Howitt 1992, Grossman and Helpman 1991, Romer

1990, and Segerstrom, Anant, and Dinopoulos 1990).3 In this framework,

technology has three major characteristics:4

1. Technology is non-rival in the sense that the marginal costs for an

additional firm or individual to use the technology are negligible.

3 See Grossman and Helpman (1995) and Aghion and Howitt (1998) for broader overviews. I will

also discuss some related work on learning-by-doing and human capital accumulation that falls
into the broad category of models of knowledge accumulation.
4 See Romer (1990). Many of these ideas have been discussed in the literature before; important

contributors include Paul David, Giovanni Dosi, Robert Evenson, Jan Fagerberg, Richard Nelson ,
Keith Pavitt, Nathan Rosenberg, Vernon Ruttan, Luc Soete, Sidney Winter, Larry Westphal, and
others (see Fagerberg 1994 and Evenson and Westphal 1995 for overviews). What distinguishes
the recent work is that it includes fully specified general equilibrium models. This means that
these technology effects can in principle be simulated and estimated in a well-defined framework.

4
 2. The return to investments towards new technology are partly private and

partly public; and

3. Technological change is the outcome of activities by private agents who

intentionally devote resources towards the invention of new products and

processes.

Out of these, points 1 and 2 are key for my purposes. The first characteristic

means that technological knowledge can serve users beyond those who are

currently employing it without raising the costs to the original set of users. Other

authors have coined the terms ‘perfectly expansible’ (David 1992) and ‘infinitely

expansible’ (Quah 2001a,b) to positively define this characteristic. It

distinguishes knowledge from rival factor inputs such as human and physical

capital; the latter can only be used by one firm at a time, or put differently, the

marginal costs to use the same factor for a second firm are infinite.

The partially private, partially public nature of the return to technological

investments implies that while there is a force that might be strong enough to

sustain the private incentive to innovate (the private return, which is often a

temporary monopoly), technological investments may also create benefits to

firms and individuals external to the inventor by adding to their knowledge base

(the public return). These benefits are usually called knowledge spillovers. An

example is that the design of a new product might speed up the invention of a

competing product, because the second inventor can learn from the first by

carefully studying the product, or even the production design.

One contribution of these theories of technical change is that they have

supplied improved micro foundations for thinking about knowledge spillovers.

5
My survey of international technology diffusion is largely an analysis of the

empirical literature of international technology spillovers and their effects on

productivity.

Two basic mechanisms for international economic activities to lead to

technology diffusion have been emphasized:5

a. Direct learning about foreign technological knowledge.

b. Employing specialized and advanced intermediate products that

have been invented abroad.

Technological knowledge in this literature is typically the design, or

blueprint, for a new intermediate product. Direct international learning about

such technology means that a blueprint is known not only to a firm in the country

where the blueprint was first developed (or firms, if there are domestic

spillovers), it also becomes known to firms in other countries. Such learning

involves a positive externality—hence: spillover--if the technological knowledge is

obtained at less than the original cost to the inventor.

The productivity of domestic invention is assumed to be increasing in a

country’s stock of knowledge, which itself is typically proportional to the number

of domestically known product designs. This assumption captures the idea that

creating a new product becomes easier as the number of already known product

designs is larger. Thus, by adding to the domestic knowledge stock, international

5 See Rivera-Batiz and Romer (1991) for an exposition.

6
spillovers raise the productivity of domestic inventive activity. It might be called

an active spillover, in the sense that the foreign blueprint becomes part of the

domestic R&D laboratories’ stock of knowledge that can be actively used to invent

new products.

According to point b., technology diffuses internationally through foreign

intermediate goods. The idea is that employing the foreign intermediate good

involves the implicit usage of the design knowledge that was created with the

R&D investment of the foreign inventor. In this sense, the technological

knowledge of the blueprint is embodied in the intermediate good. As long as the

intermediate good costs less than its opportunity costs—which include the R&D

costs of product development--, there is a gain from having access to foreign

intermediate goods. This might be called a passive technology spillover: although

an importing country has indirect access to the results of foreign R&D, the

technological knowledge embodied in the imported intermediate as such is not

available to domestic inventors—only the manufactured outcome of it is.

What kind of international activities could lead to such active or passive

spillovers? Clearly, the latter might be related to international trade and foreign

direct investment through intermediate goods imports and purchases from

foreign-owned multinational subsidiaries, respectively. Employing the

intermediate good that embodies technological knowledge is necessary for

passive spillovers to occur. An implication of this is that the patterns of passive

international technology spillovers might share certain characteristics of

international trade and FDI. For instance, the volume of international trade

7
between two countries is declining with bilateral geographic distance (see Leamer

and Levinsohn 1995). This suggests that to the extent that passive spillovers are

important, international technology diffusion might have such a spatial structure

as well.

By contrast, the purchase of intermediate goods is neither necessary nor

sufficient for spillovers of the active kind. The technological knowledge that

allows the inventor to produce a new product (or operate a new process) is often

summarized in a production plan, or blueprint. Typically, this is now stored in

electronic format, say, on a computer diskette. This blueprint is non-rival, or,

infinitely expansible, in the above sense. What governs the access to this

technological knowledge, or, put differently, what are the major determinants of

active international technology spillovers? There might be legal constraints such

as patents that allow the owner to exclude others from using the blueprint

knowledge.6 If the focus is on technological feasibility, however, the knowledge

codified in the blueprint can diffuse in any way and pattern in which a file on a

computer disk can be distributed. And since the late 20th century, it can be sent at

very low cost over computer networks to even remote places in the world.

Should one therefore expect that active technology spillovers are, in the

absence of legal constraints, global? Not necessarily. Consider first that from the

point of view of the inventor, the leaking out of knowledge to others is the

opposite of what he or she is interested in. Unless there is an explicit technology

6 Indeed, in most standard models it is assumed that the knowledge is patent-protected.

8
licensing contract, the inventor has the incentive of keeping the knowledge secret.

If international economic relations involve person-to-person contacts of people

who have the technological knowledge and others who do not, this could make it

more difficult for the inventor to prevent knowledge spillovers from occurring.

From the point of view of the learner, international contacts make it easier to

copy foreign technologies. At a broader level, international activity such as

importing, exporting, or FDI might also help to establish and sustain channels of

communication that stimulate cross-border learning of production methods,

product design, organizational methods, consumer preferences, and market

conditions.7

These considerations are strengthened when one explicitly recognizes the

fact that the view of technological knowledge that is limited to codified

knowledge is too narrow. In addition to the information that is codified in the

blueprint, there is other information that must be acquired if the technological

knowledge is to be utilized effectively. Many careful studies of technology and

how it is transferred conculde that only the broad outlines of technological

knowledge are codified—the remainder remains ‘tacit’ (Polanyi 1958).8 In

Polanyi’s view, knowledge is to some extent tacit because the person who is

actively engaged in a problem-solving activity cannot necessarily define (and

hence prescribe) what exactly he or she is doing. In this view, technological

7 It might also be possible to acquire the technological knowledge embodied in an intermediate

good by taking it apart and reverse-engineering it. This would require importing one unit of a
particular good, but not a substantial quantity of them.
8 The following draws also on Arrow (1969), David (1992), Evenson and Westphal (1995), Teece

(1977), von Hippel (1994), and references given there.

9
knowledge is only partially codified because it is impossible or at least very costly

to do so.

Teece (1977), for instance, finds that the non-codified part of the costs of

transferring technology between plants is substantial. In his sample of 26

projects, he estimates that the costs of the transfer were on average almost 20%

of the total project costs.9 It is of course possible to convert tacit to codified

knowledge (software expert systems do just that), and the costs of doing this has

fallen in some areas over recent years. However, also more recent analysis has

shown that non-codified knowledge continues to be important for understanding

patterns in the creation and diffusion of knowledge (von Hippel 1994).

What are the implications of non-codified knowledge for the role of

international economic activity in technology diffusion? Polanyi (1958, 53) argues

that tacit knowledge can be passed on only “by example from master to

apprentice”. A broader view is that non-codified knowledge is usually transferred

through demonstrations, through personal instructions, as well as through the

provision of expert services (David 1992, 221). In general, if knowledge is partly

non-codified, then person-to-person communication becomes relatively more

important for the diffusion of knowledge.

9For transferring machinery equipment technology, this share was 36% (Teece 1977, 248).
Teece’s estimates are a lower bound for technology transfer to less developed countries, as his
sample includes to two-thirds relatively advanced countries. He lists the following types of costs
(245-6): pre-engineering of technological exchanges, costs associated with transferring the
process/product design and the associated engineering, R&D personnel costs during the transfer
phase, pre-start-up training and excess manufacturing costs. Teece also shows suggestive
evidence on when these costs are particularly high or low, for instance in relation to similar
production experience (-) or general level of development (-).

10
 No doubt, the quality of communication between persons at different

locations has dramatically improved recently. However, person-to-person

communication means often still face-to-face communication. Together with the

fact that it is costly for people to move in geographic space, this suggests that the

higher is the relative importance of non-codified knowledge, the more are

technology creation and diffusion geographically centralized.10 Further, engaging

in international economic activity such as trade or FDI is invariably accompanied

by communication, not infrequently in form of face-to-face contacts. From this

perspective of partially-codified knowledge, it appears that not only passive

spillovers--embodied technology in intermediate goods--, but also active

spillovers are linked to the patterns of international economic activity, instead of

being uniformly distributed (or distributable) throughout the world.11

Alternative views on technological knowledge and its diffusion

10 Evidence supporting this view is provided in von Hippel (1994) and Feldman and Lichtenberg
(1997). The former finds that when technological knowledge is non-codified, the problem-solving
activity must often be located on-site—it cannot be done effectively from a distance. Von Hippel
also finds that when knowledge is non-codified in different locations, optimal business strategy
typically implies to adopt a sequential and iterative, not simultaneous, pattern of problem-
solving. Feldman and Lichtenberg (1997) construct measures of tacitness of knowledge for their
study of R&D activities in the European Union. They find that the more tacit knowledge is, the
more centrally located are the R&D activities.
11 Note another distinction frequently made in the literature on spillovers, that between rent and

knowledge spillovers (e.g., Griliches 1995). The former are productivity spillovers only in a
measurement sense, because they occur solely because, for example in computing the productivity
of the intermediate good-using industry, one does not properly take account of the high quality of
the intermediate good. This leads to an overestimate of the productivity of the intermediate-using
industry. Major reasons for that are unavailable, or slowly adjusted price indices. By contrast,
knowledge spillovers are ‘true’ spillovers in the sense that they involve a positive externality. In
practice, it has been difficult to separate these two types of spillovers empirically. Because passive
spillovers as characterized above involve the purchase of goods, they might involve often an
element of rent spillovers. Productivity calculations are also complicated by the need to do this in
a way that accounts for new goods (see Feenstra, Markusen, and Zeile 1994).

11
 Alternative views include Mankiw (1995) and Parente and Prescott (2000)

who think of technological knowledge as a global pool of knowledge, available to

firms and individuals in all countries. Their explanations for differences in per

capita income across countries differ though. In Mankiw’s view, the explanation

lies in differences in complementary factor accumulation, especially of physical

and human capital.12 Recent analysis suggests that this hypothesis is difficult to

maintain (Klenow and Rodriguez-Clare 1997, Hall and Jones 1999). Instead, a

large part of cross-country differences in income per capita have to do with total

factor productivity (TFP).13

In Parente and Prescott’s (2000) view, even though technological

knowledge is global, productivity differences are not primarily explained by

differences in the availability of rival factors. Instead, the main cause of cross-

country productivity differences is that there exist differences in the actually

employed technological knowledge. According to Parente and Prescott, this

results in turn from cross-country differences in the countries’ resistance to adopt

the world’s frontier technological knowledge.

This emphasis on policy differences resulting from different political-

economy equilibria is a priori plausible. At the same time, while policy

12 It often involves noting that rich countries have higher-quality capital than poorer countries.

Differences in technological knowledge are thereby subsumed into differences in the quality of
capital goods. For example, Mankiw (1995, 281) argues that countries share the same production
function, but “when an economy doubles its capital stock, it does not give each worker twice as
many shovels. Instead, it replaces shovels with bulldozers”. Following this line of argument leads
to an analysis of growth from an accounting perspective. It is not very helpful, though, for
explaining the fundamental causes of growth and income differences. See also Romer (1992).
13 See also Prescott (1998) and Easterly and Levine (2001), as well as other contributions at the

recent World Bank conference on cross-country growth regressions, at

http://www.worldbank.org/research/growth/regressions.htm

12
differences play a certain role, it seems at this point ambitious to show that policy

differences are the central reason for cross-country TFP differences. There are

plenty of instances where linking TFP differences to the activities of lobbies, state

bureaucracies, or self-interested politicians is not obvious. More empirical work

is needed that identifies the resistance-to-new-technology factor and shows that

it has major productivity effects at the macro-level.14 Moreover, if technological

knowledge is global and countries differ in their resistance to adopt it, then TFP

is country-specific, and bilateral or spatial characteristics should play no role for

the distribution of technological knowledge in the world. This implication

conflicts with the evidence that I discuss in section 6.

Finally, in a set of papers, Quah has discussed characteristics that might

characterize the knowledge-driven, or ‘weightless’ economy (e.g., Quah 2001a,b).

In his framework, technological knowledge is disembodied, codified, and global,

whereas human capital is embodied, tacit, and local knowledge. This might be a

good starting point to further study international technology diffusion. Instead,

Quah’s main interest is to analyze how certain infinitely expansible product

innovations such as computer software, video entertainment, and genetic

databases might lead to a process of technical change that is much more

influenced by consumers (or, demand) than previously, and less so by

entrepreneurs (or, supply).

Before turning to the discussion of empirical results on international

technology diffusion, I highlight in the following that not all growth effects that

14 The debate surrounding Olson’s (1982) thesis might be instructive as well.

13
have been discussed in this context have to do with international technology

diffusion.

Growth effects that are not related to international technology

diffusion
The degree of international economic activity, from the one extreme of

autarky to the other of full integration, can have important implications for a

country’s productivity through mechanisms other than international technology

spillovers. Among the important ones are:15

Trade and domestic monopoly: The liberalization of international trade

might reduce the monopoly power of domestic firms, thereby affecting pricing

behavior and the efficiency with which domestic resources are utilized (Tybout

2000 discusses the evidence). Clearly, this effect is not related to technological

knowledge diffusion from abroad.16

Trade and knowledge accumulation through learning-by-doing: If

trade liberalization triggers changes in the domestic resource allocation, this

might lead to changes in a country’s growth rate. Young (1991) for instance

develops a model with two countries, North and South, that each produces a

15 For simplicity, I focus here on international trade, but analogous arguments apply as well to
FDI and other forms of international economic activity.
16
Instead, this mechanism is similar to the “nontechnological” and “policy” determinants of TFP
that are emphasized in Solow (2001) and Klenow (2001), respectively; it is also related to Parente
and Prescott’s (2000) main thesis.

14
range of products. A country’s growth rate is determined by the prevailing level of

learning-by-doing, which is the cost-lowering effect from cumulative production.

The potential for learning-by-doing is high for more recently invented products

while for older products, learning-by-doing effects are exhausted. Young shows

that trade liberalization might slow down the rate of growth in the South relative

to autarky. This happens if the North has a comparative advantage in newly

invented products so that trade liberalization leads to a specialization in the

South on goods in which learning-by-doing is exhausted.

Trade and endogenous technical change: Grossman and Helpman (1991,

Ch.6) show that such results can be obtained also in models of endogenous

technical change. Assume that there are two final goods, X and Y, produced with

varying factor intensity, plus an R&D activity that produces inputs for the X good.

Productivity growth is related to X production, because analogous to the static

model of Ethier (1982), an increasing set of specialized intermediate inputs

allows the production of more output with the same amount of inputs. In this

situation, the growth effects of trade liberalization depend on whether it raises or

lowers the relative price of good Y (that is, it again depends on comparative

advantage). If trade liberalization raises it, resources move out of X production

(and the R&D laboratories) and into the Y sector. As a consequence, growth slows

down relative to before. The opposite occurs if trade liberalization lowers the

relative price of good Y.

15
 Trade liberalization might have important growth effects through changes

in the domestic resource allocation, although I am not aware of much evidence

that shows this to be the case (see also the overview in Tybout 2000, pp.37-38). It

is worth emphasizing, though, that these particular models do not involve the

international diffusion of technology. This is clear from the fact that it is possible

to find a tax and subsidy policy that affects the domestic resource allocation in

just the same way as trade liberalization does, and which therefore has the same

growth effects. 17 These models highlight the fact that there might be growth

effects from trade liberalization that are not related to international technology

diffusion. Arguably, one might expect the diffusion effects associated with

international trade to be of dominant importance, at least for less developed

countries. I will discuss the available evidence below. In any case, insofar as what

diffuses is additional knowledge, it is difficult to see how this could lower a

country’s growth rate and welfare relative to autarky: access to more, rather than

less, knowledge, just like more choices, should leave a country at least weakly

better off.

I now turn to discussing basic results on the international diffusion of

technology.

17
The standard mechanisms of international technology diffusion are not present in either
Grossman and Helpman’s or Young’s model. In the former model, neither are the specialized
intermediate inputs internationally tradable, nor are there domestic learning effects from foreign
R&D. In the latter model, each country’s stock of knowledge depends only on its range of
production; there is no direct link between domestic and foreign stocks of knowledge. Moreover,
the learning-by-doing stages that the North has passed through are not transferable: they have to
be repeated by the South.

16
3. International technology diffusion: basic

magnitudes

A number of different approaches have been employed to study empirically

the importance of international technology diffusion. The first and largest set of

papers consists of so-called international R&D spillover regressions. 18 This

literature studies the productivity effects of foreign R&D on domestic

productivity. It is analogous to the literature that has examined the effects of

other firms’ R&D on a given firm’s productivity in a closed economy (Griliches

1979, 1995; Scherer 1984). Typically, a production function approach is used to

relate TFP to measures of domestic (R) and foreign R&D (S) activities

ln TFPct = α c + α t + β r ln Rct + β s ln S ct + ε ct ,

where c indexes country and t subscripts time; αc and αt make for a generalized

and time-varying intercept, and εct is an error term. The definition of S, the term

capturing the impact of foreign R&D, is typically given by a weighted sum of

other countries’ R&D:

S ct = ∑ ω cht S ht ,
h≠c

where ωcht is a bilateral weight that captures the relative importance of R&D in

country h for productivity in country c. In the earlier literature on inter-industry

technology diffusion in a given country, the ω are often input-output shares.

More recent studies of international R&D spillovers, for example by Mohnen

(1992) and Coe and Helpman (1995), have employed import shares shares as

18 See Mohnen (2001) for a recent survey.

17
weights. Depending on the particular channel of technology diffusion that

authors analyze, also FDI or other weights have been employed (see section 4

below).

These regressions are partial-equilibrium in nature, and the R&D

expenditures, as well as the weights ω, are often endogenous. In addition,

omitted variables might be causing biases. The work in this literature varies in

the extent to which the authors address these potential problems. At its best, this

approach provides useful information on the long-run average relationship

between R&D and productivity in a reduced-form framework.

The importance of international technology diffusion can be calculated in

a number of ways. One approach is to compare the TFP elasticities of domestic

and foreign R&D. Coe and Helpman (1995) estimate for their sample of 22

industrialized countries a domestic R&D elasticity of about 8% for the 15 smaller

countries, and 23% for the G-7 countries.19 The corresponding elasticities with

respect to foreign R&D are about 12% and 6%, respectively. Thus, for the 15

smaller countries, the effect from foreign R&D is larger than that from domestic

R&D, with a factor of about 1.5. The share of about 20% for foreign R&D in the

total elasticity effect for the G-7 countries is similar to Keller’s (2001c) estimate in

his analysis of the G-7 countries plus Sweden using data at the industry level. By

contrast, Park (1995) in his analysis of aggregate data for ten OECD countries

(including the G-7) estimates that foreign R&D accounts for about two thirds of

19 These are Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States.

18
the total effect of R&D on productivity (domestic R&D elasticity of 7%, foreign

R&D elasticity of 17%).

In a series of papers, Eaton and Kortum (1997, 1999) and Eaton, Gutierrez,

and Kortum (1998) have developed general equilibrium models in which

productivity growth is related to increases in the quality of intermediate goods.20

As is often the case in empirical work based on a structural model, in order to

arrive at a framework that can be estimated, Eaton and Kortum have to make

some strong assumptions. For instance, the quality of technological knowledge

that is discovered in a country in Eaton and Kortum (1999) is a random variable

with a Pareto distribution, while the distribution of the time until it has diffused

to other countries is exponential. Assumptions such as these are difficult to test in

the context of a given model. Eaton and Kortum’s empirical results are thus

better viewed as estimating or simulating a particular model, rather than

selecting one model among several, or testing it.

Eaton and Kortum’s work shows that the pay-off to this can be high. Their

framework allows not only studying the reduced-form relationship between R&D

and productivity, but also the models’ predictions for the transitional adjustment

path to the long-run equilibrium (Eaton and Kortum 1997). They also examine

the effects of changes in economic policy (Eaton, Gutierrez, and Kortum 1998),

and Eaton and Kortum (1999) model R&D and the diffusion of knowledge

together with the related activity of international patenting. With regard to the

relative importance of technology diffusion from abroad, the latter paper

20 This is as in the ‘quality-ladder’ model of Aghion and Howitt (1992); see also Howitt (2000).

19
presents results based on data for the G-5 countries around the year 1988. Eaton

and Kortum estimate that the part of productivity growth that is due to domestic

as opposed to foreign R&D is between 11% and 16% in Germany, France, and the

U.K.; it is around 35% for Japan, and about 60% for the United States (1999,

Table 5).

The recent work by Keller (2001a,b) represents a third approach. Unlike

Eaton and Kortum’s work based on general equilibrium models, Keller studies

the relationship between productivity and foreign R&D in a single-equation,

partial equilibrium framework. And unlike the R&D spillovers literature

discussed above, Keller (2001a,b) estimates the TFP effect of foreign R&D jointly

with the importance of one or more channels of diffusion for foreign R&D. One

can view this as estimating the weights ω of the foreign R&D variable together

with the parameter β that measures the TFP elasticity. Estimating the weights

instead of assuming particular weights that are taken from data tables means to

impose less structure ex-ante. Given how little is known on international

technology diffusion to date, this seems to be reasonable. Using this method,

Keller (2001a) estimates that between 1983 and 1995, the contribution of

technology diffusion from G-5 countries is on average almost 90% of the total

R&D effect on productivity in nine other OECD countries (Table 6).21

These are Australia, Canada, Denmark, Finland, Italy, the Netherlands, Norway, Spain, and
21

Sweden.

20
 This shows that irrespective of which particular approach is taken, the

results invariably point to a substantial contribution of foreign technological

activity to domestic productivity. It also seems that the relative contribution of

international technology diffusion to domestic productivity growth is inversely

correlated with economic size and with the level of development.22

4. Channels of technology diffusion

Many authors have studied through which mechanisms, or channels,

international technology diffusion primarily occurs. I first look at work that has

considered international trade.

Trade

Coe and Helpman (1995) are the first to provide evidence on the

importance of trade for international technology diffusion along the lines of

recent theory. Using the spillover regressions framework shown on p.16 with

bilateral import shares as weights, these authors examine two predictions. First,

Coe and Helpman (1995) study whether a country’s productivity is increasing in

the extent to which it imports from high- as opposed to low-knowledge countries

(an import composition effect). Second, for a given composition of imports, these

22This would be very important for less developed countries. Primarily due to the much greater
difficulty in obtaining comparable and high-quality data for less developed countries, there is a
relative paucity of results in this regard. See, however, Coe, Helpman, and Hoffmaister (1997),
Connolly (1998), and Mayer (2001), as well as the discussion below.

21
authors analyze whether a country’s productivity is higher, the higher is its

overall import share. Coe and Helpman’s regression results suggest that there is

support for both predictions. The authors conclude that international R&D

spillovers are related to the composition of imports, and that the overall level of

imports is important for international technology diffusion as well. Coe, Helpman

and Hoffmaister (1997) find similar effects in their analysis of foreign technology

diffusion from highly industrialized to 77 less developed countries.23

By contrast, Eaton and Kortum (1996) find that once distance and other

influences are controlled for, bilateral imports do not help to predict bilateral

patenting activity, the indicator of international technology diffusion in their

model. Moreover, Keller (1998) repeats the Coe and Helpman (1995) regressions

with counterfactual ‘import’ shares.24 For there to be strong evidence for trade-

related international R&D spillovers, he argues, one should estimate a positive

effect from foreign R&D when bilateral import shares are employed, but no

strong effect when counterfactual ‘import’ shares are used. Keller finds similarly

high coefficients and levels of explained variation when counterfactual instead of

actual import shares are used. He concludes that, on the basis of their analysis,

Coe and Helpman’s claim cannot be upheld: the import composition of a country

has not a strong influence on the regression results. 25 Keller’s (1998) results have

led some to doubt the importance of trade for international technology diffusion.

23 Nadiri and Kim (1996) show results from estimating cost functions in OECD countries; their
approach also uses the bilateral-imports weighted spillover variable.
24 That is, instead of bilateral import shares, Keller (1998) uses counterfactual (or, made-up)

shares in creating the foreign R&D variable S (see p.16).

25 Keller (1997a) presents analogous results in the context of inter-industry technology flows.

22
 More recent work has strengthened the evidence for import-related

international technology diffusion. Keller (1997b, 2000) has extended his

analysis of estimating international R&D spillovers with counterfactual data by

moving to industry-level data for eight industrialized countries. His results

suggest that import composition might not matter for technology diffusion if

countries’ import patterns are more or less symmetric, but they do matter if

countries receive a relatively high share of its total imports from one particular

country—such as is the case for Canada, for example, which imports about 80%

from the United States.26

Moreover, Xu and Wang (1999) show that the import composition effect is

robust when one considers capital goods trade instead of all-manufacturing

goods trade. Xu and Wang show that if the weights in the construction of the

foreign R&D variable S are capital goods import shares, one obtains an R2 of

77.1%, versus 74.9% with Keller’s (1998) counterfactual shares, and 70.9% in Coe

and Helpman (1995). Also Lumenga-Neso, Olarreaga, and Schiff (2001) have

26 As Coe and Hoffmaister (1999) emphasize, Keller (1998) creates his counterfactual ‘import’
shares in a way that makes their variance across different simulations rather small, and values
higher than 0.3 are essentially never obtained. Thus, his import shares are not fully random in
that sense. This was first pointed out in 1996 by an anonymous referee at the European Economic
Review to both Keller and the editor, Elhanan Helpman. Keller’s (1998) paper includes therefore
results with the unweighted sum of foreign R&D as well. These do not support the Coe and
Helpman (1995) claim that international R&D spillovers are related to the composition of imports
either, which is Keller’s (1998) point (see his Table 2). In a different context, Keller (1997b, 2000)
shows that certain randomizations of import shares lead to equally strong empirical results as
those based on observed imports, while others do not. He also discusses the relationship between
random import shares and unweighted sum-of-foreign-R&D regressions. Coe and Hoffmaister
(1999) show that for three types of randomizations of import shares, the Coe and Helpman (1995)
framework does not lead to a finding of international R&D spillovers. This means that the
bilateral import shares have some power.

23
revisited the results of Coe and Helpman (1995) and Keller (1998). Instead of

computing the foreign knowledge variable as a bilateral-import share weighted

sum of foreign R&D, Lumenga-Neso, Olarreaga, and Schiff construct an

alternative variable that aims at taking account of previous rounds of imports as

well. This captures the case that even if some country c imports only from some

other country h, for instance, the former might still gain access to technology

from countries other than h—if country h has in turn imported from those other

countries before. Using this variable, Lumenga-Neso, Olarreaga, and Schiff find

slightly stronger results than Keller (1998).

Other evidence on the importance of trade for international technology

diffusion includes Sjöholm (1996), who examines citations in patent applications

of Swedish firms to patents owned by inventors in other countries. Patent

citations as indicator for knowledge flows have proven to be useful recently in a

number of other studies (see the following section, section 6, and section 9).

Controlling for a number of other correlates and also conducting an extreme-

bounds analysis, Sjöholm finds a positive correlation between Swedish patent

citations and bilateral imports. This result is consistent with imports contributing

to international knowledge spillovers.

Two recent papers by Eaton and Kortum (2001a,b) also focus on the

importance of trade for the international diffusion of technology. The authors

combine the structure of technology diffusion and growth in Eaton and Kortum

(1999) with that of the Ricardian trade model due to Dornbusch, Fischer, and

24
Samuelson (1977). A country’s productivity level is related to its implicit access to

foreign technology through equipment good imports. Thus, their notion of

technology diffusion is one of passive (embodied) technology diffusion. Transport

costs that increase in geographic distance imply that productivity in remote

countries is relatively low, ceteris paribus, or equivalently, the price of equipment

goods is relatively high. Eaton and Kortum (2001a) use this framework to predict,

for example, that 25% of the cross-country productivity differences among 34

more- as well as less developed countries can be attributed to differences in the

relative price of equipment. It would be interesting to see how international trade

might at the same time increase the likelihood of active knowledge spillovers.

This would also allow the estimation of the relative importance of active and

passive spillovers for international technology diffusion.

The work discussed so far focuses on technology diffusion related to

imports. Learning through exporting, however, might be important as well (e.g.,

Rhee, Ross-Larson, and Pursell 1984). A number of recent studies, including

Bernard and Jensen (1996)--using U.S. data--, and Clerides, Lach, and Tybout

(1998)--using data from Colombia, Mexico, and Morocco--have used micro data

to see whether there is evidence for learning-through-exporting. While exporting

firms tend to be more productive than non-exporters in the cross-section, neither

paper finds robust evidence that past exporting experience (Granger-) causes

improvements in performance once other differences across firms have been

25
taken into account. Thus, the available evidence does not point to strong

learning-through-exporting effects.27

Other mechanisms

Foreign direct investment

Foreign direct investment (FDI) often involves the transfer of knowledge

from one country to another (e.g., Carr, Markusen, and Maskus 2001), making it

a potentially important vehicle for international technology diffusion.28

Lichtenberg and van Pottelsberghe de la Potterie (1996) have analyzed the

importance of FDI for international technology diffusion in thirteen OECD

countries with the same R&D weighting approach that Coe and Helpman (1995)

and Keller (1998) use for imports. Lichtenberg and van Pottelsberghe de la

Potterie (1996) find that a country’s outward FDI gives access to foreign

technology. At the same time, they do not find significant effects from inward

FDI. Baldwin, Braconier, and Forslid (1999) find some positive inward FDI

spillover effects in their industry-level study, but overall, the results are mixed.

To some extent, this might have to do with the fact that good data on bilateral

FDI is available to a much lesser extent than for trade. Therefore, the two above

studies employ data on FDI stocks that is derived from balance-of-payments

27For more details see Tybout (2001).

28Blomström and Kokko (1998) have recently surveyed a number of ways how FDI could lead to
spillovers.

26
accounts. However, good measures of multinational activity, such as subsidiary

GDP, sales, or its number of employees, are related to FDI stocks derived from

balance-of-payment data only with a considerable amount of error.29

Xu (2000) uses the Bureau of Economic Analysis’s data on U.S.

multinational enterprise (MNE) activity to study the relationship between U.S.

outward FDI and productivity growth in the host country. His analysis covers

total manufacturing between 1966 and 1994 for 40 countries, of which about half

are more and half are less developed countries. Xu finds generally a positive

correlation between productivity growth and the ratio of subsidiary value added

to host country GDP. This effect is stronger and more robust in the more

developed countries than in the less developed countries.

As the availability of micro data has become greater, the study of FDI

spillovers has increasingly turned to it. Aitken and Harrison (1999) examine data

on Venezuelan plants between 1976 and 1989. They estimate a negative

relationship of increased FDI presence and TFP of domestic plants. This can be

rationalized if the estimates pick up a combination of the knowledge spillover

effect (which is non-negative) and competitiveness or other effects. It could also

arise from multinationals being attracted to industries where domestic

competitors are structurally weak, if the estimation fails to fully control for this

simultaneity effect. In any case, the effects could be short-term responses; as

29One important reason for this is that FDI does not necessarily involve net flows of capital,
because the latter can be raised in local capital markets.

27
Aitken and Harrison note, their analysis may fail to capture the long-run effects

of FDI (p.617). 30

Girma and Wakelin (2001) use micro-data from the U.K. Census of

Production to study the effects of inward FDI in the United Kingdom. The

authors focus on the electronics industry between 1980 and 1992. Girma and

Wakelin (2001) test whether plant productivity growth is systematically

correlated to the ratio of foreign-owned plants to all plants in a given four-digit

industry (and also by foreign investor country). Other variables are FDI in a given

geographic region within the U.K., and FDI in a given two-digit industry. The first

tests for intra-industry FDI spillovers, the second and third for FDI spillovers

from geographic and technological proximity, respectively. The authors find a

positive productivity effect from Japanese and Other foreign FDI, but not from

U.S. FDI. There is also evidence in support of FDI spillovers from technological

proximity, but no evidence that within-region spillovers are stronger than those

across regions.31

Haskel, Pereira, and Slaughter (2001) use the same database, but add both

more years and plants from all of manufacturing to the sample. They confirm the

Girma and Wakelin (2001) findings that technological proximity seems to matter

30 FDI presence in Aitken and Harrison (1999) is measured as the share of employment of

foreign-owned firms in total employment. This variable can change without a change in
employment by foreign-owned firms. Aitken and Harrison report, however, that including foreign
employment and domestic employment separately in the regression leads to similar results
(p.610). This point applies also to the studies by Girma and Wakelin (2001) and Haskel, Pereira,
and Slaughter (2001), discussed below. I have not seen a discussion of this point in the latter
papers, so I assume that it does not alter the results there either.
31 Jaffe, Trajtenberg, and Henderson (1993) as well as Adams and Jaffe (1996) find evidence that

distance matters for domestic technology diffusion. To be consistent with that, Girma and
Wakelin’s result might have to be interpreted as saying that conditional on technology coming
from abroad, geographic distance within a country does not matter. See also section 6 below.

28
for FDI spillovers, whereas geographic proximity within the U.K. does not. By

contrast, Haskel, Pereira, and Slaughter (2001) estimate positive spillovers from

U.S. and French FDI, whereas Japanese FDI is here negatively correlated with

productivity growth.32

Kinoshita (2000) presents firm-level evidence on the effects of inward FDI

in the Czech Republic between 1995 and 1998.33 Unlike the other studies,

Kinoshita has information on R&D expenditures of the domestic firms, which

might be an important omitted variable. Controlling for R&D, Kinoshita fails to

find positive spillovers from inward FDI into the Czech Republic; however, there

is a robust effect if the FDI variable is interacted with the firm’s own R&D

spending. A plausible interpretation of this is that the effects of international

technology diffusion through FDI are conditional on a relatively high ‘absorptive

capacity’ (Cohen and Levinthal 1989), as measured by own R&D investments.34

32 The differences in results relative to Girma and Wakelin (2001) could be in part related to
differences in the estimation technique. Girma and Wakelin favor a variant of the Olley and Pakes
(1996) technique, whereas Haskel, Pereira, and Slaughter (2001) employ a time differencing
approach. The former method is conceptually more appealing, but it also requires making more
specific assumptions that are difficult to test. Based on supplemental results for the Girma and
Wakelin study using the time differencing method—provided to me by Sourafel Girma--, I can
compare their FDI spillover results using the modified Olley and Pakes technique with those
based on time differencing. At a 5% significance level, there are qualitative differences in 3 out of
10 of the key estimated coefficients in their Table 7. This does not settle the question of which
estimates are closer to the true parameters. However, in my view it suggests that to examine
whether some of the assumptions in the Olley and Pakes framework can be tested or generalized
is an interesting research project.
33 The data comes from two surveys of the Czech Statistical Office. Because there is relatively little

documentation on these so far, some caution is required in interpreting what follows.

34 Haskel, Pereira, and Slaughter (2001) find the FDI effects to be strongest for plants at the low-

to medium range of the distribution of skill intensities (skilled to unskilled workers); this seems to
be not the plants with the highest absorptive capacity. Kinoshita (2000) also distinguishes FDI
spillover effects for domestically-owned from those for foreign-owned firms, finding that only the
former benefit. It would be interesting to see whether this also holds in the UK sample.

29
 Globermann, Kokko, and Sjöholm (2000) analyze 220 patent applications

by Swedish MNEs and non-MNEs in the year of 1986. These applications contain

patent citations that the authors relate to both inward FDI from the cited

countries as well as to outward FDI to the cited countries. Using a conditional

logit estimation framework, Globermann, Kokko, and Sjöholm (2000) estimate a

robust correlation between outward FDI and patent citations—not only for

MNEs, but also for non-MNEs--, whereas there is none on the inward side.

Branstetter (2001a) analyzes a larger number of patent applications and patent

citations between the U.S. and Japan.35 While Branstetter (2001a) can measure

FDI only by establishment counts, he can control for the firms’ R&D spending,

which is a plus (see above). The data also allows him to distinguish product

development subsidiaries—which presumably are relatively knowledge-intensive-

-from other subsidiaries. Branstetter finds that more FDI is associated with more

patent citations, both from U.S. firms to Japanese firms and vice versa.

Communication patterns

Some evidence has begun to emerge on the importance of communication

for international technology diffusion. Recent innovations have improved the

communication and monitoring abilities between geographically distant plants,

which has made it easier to outsource certain stages of production. This suggests

that communication between geographically distant persons might also play a

more important role today than it used to. At the same time, this does not

35 This is based on data for Japanese-owned FDI in the United States.

30
necessarily mean that person-to-person communication patterns have become

aspatial, for at least two reasons. First, remote communication might only be an

imperfect substitute for face-to-face communication, and this point is reinforced

if knowledge is to some extent tacit. Second, communication is to some extent

spatial as long as international trade is, because trade requires some

communication to develop in the first place. Moreover, more communication is

also the consequence of international trade. Analogous arguments apply to FDI

and other international economic activities.

Keller (2001a,b) uses the imperfect proxy of bilateral language skills in the

population at large to examine the importance of communication patterns for

international technology diffusion among OECD countries. His results suggest

that differences in communication patterns might have quite strong effects. For

instance, if the share of English speakers in Spain (at 17%) would rise to the level

of the share of English speakers in the Netherlands (at 77%), Keller (2001a)

estimates that for Spain, this would be equivalent to a 15% boost of technology

diffusion from English-speaking countries.

Simultaneous analysis of multiple channels of

technology diffusion

Although a few recent studies have considered several channels of

technology diffusion simultaneously, the majority of them still examines only one

31
channel in isolation.36 As documented by Kraay, Isoalaga, and Tybout (2001),

firms do not typically engage in one type of international activity by itself; rather,

they are engaged in several of them. Kraay, Isoalaga, and Tybout use information

on whether a firm is (i) importing intermediate goods, (ii) exporting, or (iii)

foreign owned, as well as combinations of these. As in Clerides, Lach, and Tybout

(1998), the data comes from three panels of firms in Morocco, Mexico, and

Colombia. Kraay, Isoalaga, and Tybout find no significant effects of international

economic interactions on the firm’s marginal cost or the quality of the good that

it produces. By contrast, Keller (2001b)’s industry-level analysis of spillovers

among the G-7 countries finds significant effects for imports, inward FDI, as well

as communication links. In a breakdown of the total effect, he attributes more

than 50% of the total effect to imports, and the remainder to equal parts to FDI

and communication links.

5. Heterogeneity and inter-industry effects

R&D spending is highly concentrated by industry. Among OECD countries,

for instance, Keller (2001a) reports that about 80% of all manufacturing R&D is

conducted in four three-digit ISIC industries: chemical products (including

drugs), electrical and non-electrical machinery (including computers and

telecommunication equipment), and transportation equipment. Because it is a

priori plausible that international technology diffusion is most important in

industries that account for a substantial part of all R&D, some authors have

36See, however, Globermann, Kokko, and Sjöholm (2000) and Lichtenberg and van Pottelsberghe
de la Potterie (1996), who both analyze trade and FDI.

32
restricted their analysis right from the start to such ‘high-technology’ industries

(e.g., Bernstein and Mohnen 1998). Other authors have tried to compare the

magnitude of effects across industries. These studies fall primarily into the

following two broad categories.

A first set of papers, including Coe, Helpman, and Hoffmaister (1997) and

Meyer (2001), is based on studies that explore the importance of international

trade as a mechanism of international technology diffusion (see also Xu and

Wang 1999, discussed in section 4 above). Using foreign knowledge stocks that

are constructed as import-weighted sums of R&D in industrialized countries,

Coe, Helpman and Hoffmaister (1997) find stronger and more robust evidence

for North-South spillovers using machinery and equipment import data (SITC

class 7) than employing either all-manufacturing or total import data.37 Meyer

(2001) argues that this includes still many consumption and equipment goods

that are unlikely to lead to much technology diffusion. His focus on machinery

imports is confirmed in the sense that the machinery-imports based variable

enters with a coefficient that is twice as large as in the corresponding regression

using the variable based on all SITC imports (Meyer 2001, Tables 6,8). 38

Another way to examine heterogeneity is to see whether the estimated

spillover effects vary in magnitude across industries. Keller (2001a,b) analyzes

37 Connolly (1998) in her cross-country growth analysis of innovation and imitation uses the SITC

class 7 data as well.

38 For similar reasons, Keller (1997b, 2000) uses disaggregated data as well. He relates data on

specialized machinery imports--at the three- and four-digit SITC level—to productivity at the two-
and three-digit ISIC class level.

33
panels of twelve manufacturing industries. Eight of these twelve industries

account for only about 20% of all manufacturing R&D, whereas—as mentioned

earlier--the remaining four industries make up for the remaining 80%. Keller

shows separate regression results for the sample of low-R&D industries,

estimating that the elasticity of TFP with respect to R&D there is only about 70%

of the average elasticity for all twelve industries. In his study of trade and

technology diffusion in Latin America using the spillover regressions framework

from above, Blyde (2001) finds stronger effects from OECD imports than from

Latin American imports. He attributes this result primarily to the fact that OECD

imports have a higher embodied technology content than Latin American

imports.

These results are consistent with international technology spillovers varying

greatly in strength across different set of goods. Another literature has started to

assess the importance of international technology diffusion from one set of

products to another. In particular, some authors have suggested that advances in

ICTs might have strong productivity effects in other industries, perhaps even

abroad. Gera, Gu, and Lee’s (1999) estimates of technology spillovers from the

U.S. to Canada suggest that technology spillovers embodied in ICT imports from

the U.S. have about four times the effect on labor productivity in Canadian

industries as spillovers embodied in non-ICT imports.

Keller’s (2001c) analysis provides an estimate of productivity effects from four

different sources of R&D: domestic R&D as well as foreign R&D, both in the same

industry as well as in other industries. Using an input-output matrix to model

34
inter-industry technology flows, his findings suggest that the importance of

foreign R&D outside the industry itself is as important for productivity as the

foreign R&D within the industry.39

6. Geographic localization of international

technology diffusion

It was noted earlier that income convergence depends on whether

technology spillovers are local or global, with strong international diffusion

favoring convergence and geographically localized diffusion making divergence

more likely. Thus, a number of authors, including Jaffe, Trajtenberg, and

Henderson (1993), Irwin and Klenow (1994), Jaffe and Trajtenberg (1998), Eaton

and Kortum (1999), and Branstetter (2001b), provide results on whether

technology diffusion within a country is stronger than across countries.

Using patent citations as their measure of knowledge flows, Jaffe,

Trajtenberg, and Henderson (1993) compare the geographic location of patent

citations with that of the cited patents in the United States. Their key finding is

that U.S. patents are significantly more often cited by other U.S. patents than

they are cited by foreign patents. Branstetter (2001b) uses R&D and patenting

data on U.S. and Japanese firms to compute weighted R&D spillover stocks

analogous to Coe and Helpman’s (1995) bilateral import share weights.40

39 See also the evidence on spillovers in technologically proximate fields in the section on FDI
above.
40 Patenting data by technological field allows Branstetter to compute weights that are increasing

in the similarity of two firms’ patenting activities; this captures the idea that R&D expenditures of

35
Branstetter finds that within-country spillovers are much stronger than between-

country spillovers. The work on patenting and international technology diffusion

by Eaton and Kortum (1999) and Jaffe and Trajtenberg (1998) supports this

result as well.

However, Irwin and Klenow’s (1994) study of learning-by-doing spillovers

in the semiconductor industry finds the opposite.41 These authors estimate that

for eight vintages of semiconductors introduced between 1974 and 1992, the

learning spillovers from one U.S. firm to another U.S. firm are not significantly

stronger than those between an U.S. firm and a foreign firm. The different results

might be obtained because Irwin and Klenow’s learning-by-doing spillovers,

which are identified from the effects of cumulative production on market shares,

are different from knowledge spillovers as measured in the other studies.42 It

could also be due to the market structure of the semiconductor industry, which

had only relatively few firms that were located primarily in the U.S. and in Japan

during this period.

In order to make further progress, it might therefore be necessary to study

geographic effects in technology diffusion beyond the basic “border effect”. The

most direct approach is to analyze international technology spillovers conditional

on geographic distance and the location of countries relative to each other. By

another firm is more likely to generate spillovers, the closer the two firms are in technology space
(see Jaffe 1986).
41 Learning-by-doing spillovers are most closely related to human capital models (e.g. Lucas 1988,

1993), not to models of endogenous technological change. However, it is not clear that empirical
analysis has been able to separate one from the other so far. I thus include the following
discussion.
42 In particular, the effects captured by Irwin and Klenow are much broader than the notion of

knowledge flows as evidenced by patent citations.

36
estimating whether there is geographic decay in the strength of technology

spillovers, Keller (2001a,b) has done this for OECD countries. For example, if

geographic proximity matters for benefiting from international technology

diffusion, then technology created in the U.S. should have a stronger influence on

productivity in Canada than in Germany; and the latter effect should in turn be

stronger than the effect in Australia, ceteris paribus.

Keller (2001a) uses industry-level data from 14 OECD countries between

1970 and 1995. He relates productivity in nine mostly smaller OECD countries to

R&D conducted in the G-5 countries, and allows for the possibility that the

strength of the R&D effects are conditional on a country’s bilateral distance to the

G-5 countries. He estimates a simple exponential decay function:

ln TFPcit = β ln Rcit + γ ∑ Rhit × e −δD  + α' X + ε cit .

ch

 h≠c 

Here, Rh is R&D in the G-5 country h, and Dch is the geographic distance between

countries c and h. The vector X is a set of other variables that help to control for

the effects of simultaneity. Of key interest in this framework is the parameter δ:

for δ> 0, variation in productivity levels is best accounted for by giving a lower

weight to R&D conducted in countries that are located relatively far away,

whereas if δ=0, then geographic distance and relative location do not matter.

Keller (2001a) estimates δ to be positive, which is consistent with the geographic

localization of international technology diffusion.43

43See also Bottazzi and Peri’s (1999) analysis of geographic effects in the diffusion of technology
among European regions.

37
 What is the magnitude of this effect? The exponential specification allows

to compute the ‘half-life of technology’ in terms of distance-- the distance after

which half of the technological knowledge that originates from a technology

sending country has disappeared. Keller (2001a) estimates it to be only about

1,200 kilometers. This corresponds to a very rapid geographic decay. If literally

true, it implies that for instance Australia, with its remote geographic location

relative to the G-5 countries, benefits extremely little from international

technology diffusion. Instead of analyzing technology diffusion from the G-5 to

mostly smaller OECD countries, Keller (2001b) studies technology diffusion

among the G-7 countries, which account for about 90% of the world’s R&D

spending. Using similar methods, he confirms the finding of localization of

technology diffusion, estimating a half-life of technology between 800 and 1,900

kilometers.

From an economic viewpoint, the finding that geographic distance matters

is only the first step, of course. The question is, why does distance matter? At a

prescriptive level, it is clearly impossible to design economic policies that “move

Australia geographically closer to the G-5 countries”, at least in a literal sense.

Thus it is important to see whether the geography effect can be related to the

economic interactions across countries, including those discussed in section 4

above.

Keller (2001b) considers the technology diffusion channels of imports,

FDI, and communication. He introduces variables that measure the strength of

each of the respective bilateral channels in analogy to geographic distance in the

38
equation on page 36. According to his analysis, each channel individually has a

positive effect on international technology diffusion. When the channels of

imports, FDI, and communication are considered together with distance, Keller

does not estimate a geographic localization effect anymore.44 This suggests that a

substantial portion of the distance effect in technology diffusion, and may be all

of it, can be accounted for by differences in imports, FDI, and communication

links across countries. 45

7. Changes in the scope and strength of diffusion

over time

Today’s level of economic integration in the world is high by historical

standards (e.g., Feenstra 1995). International trade has been growing faster than

income, and transport costs for goods have been falling. Multinational activity

has been growing faster than trade, spurred in part by the development of new

communication technologies. And the Internet is considered by many to be the

primary symbol of a globally integrated world.

What does this mean for technological diffusion? Is there now a common

pool of global technology, and distance is, as some have suggested, “dead”? The

44 Keller’s (2001b) results suggest that communication patterns are particularly effective in
accounting for the geographic localization effect (see his Table 7). This, however, might be specific
to the particular sample, where Japan is located most remotely and communicates the least
according to Keller’s data.
45 See also Sjöholm (1996) who finds that bilateral geographic distance between Sweden and other

countries has no robust effect on the number of citations in Swedish patent applications, once
differences in bilateral international trade have been controlled for.

39
recent papers by Keller (2001a,b) provide some initial evidence on this. He

estimates whether the parameter that captures localization in his specification

has changed over time. Keller finds that the absolute value of the distance

parameter has fallen substantially between the mid-1970s and the 1990s. This is

consistent with a strong decline over time in the degree to which technology is

geographically localized. It constitutes some initial quantitative evidence that

technological knowledge has become less country-specific recently.

8. Major determinants of successful international

technology diffusion

There are big differences in the degree of success that countries have in

adopting foreign technology. Another strand of the literature has therefore asked

what the major determinants of successful technology diffusion from abroad are.

Differences in the degree of success of technology adoption could mean that

income variation in the world is either increasing (divergence) or decreasing

(convergence) over time. There are some preliminary findings suggesting that

between the years 1983 and 1995, technology diffusion from the G-7 countries

had stronger effects on growth in the relatively rich than in the poorer countries

(Keller 2001d). This might in part explain the trend towards income divergence

for the world as a whole during this period.

Two determinants of successful technology diffusion that have been

emphasized are human capital (Nelson and Phelps 1966) and R&D (Cohen and

40
Levinthal 1989). Both are associated with the notion of absorptive capacity, the

idea that a firm or country needs to have a certain type of skill in order to be able

to successfully adopt foreign technological knowledge.46 This can be, first of all,

in form of science and engineering human capital. It can also be in form of

another factor, first emphasized by Cohen and Levinthal (1989): a firm might

need to invest itself into R&D. These authors argue that this is critical to enabling

the firm to understand and evaluate new technological trends and innovations,

which is a necessary condition for successful technology adoption.

Along these lines, Eaton and Kortum (1996) find that inward technology

diffusion as measured by international patenting is increasing in the level of a

country’s human capital. Xu (2000) provides evidence suggesting that the reason

why relatively rich countries benefit from hosting U.S. multinational subsidiaries,

while poorer countries do not as much has to do with a threshold level of human

capital in the host country. Caselli and Coleman (2001) use data on imports of

office, computing, and accounting machinery as a measure of inward technology

diffusion, arguing that many countries do not have a domestic computer

industry, so that computer technology comes necessarily from abroad. They find

that computer imports are positively correlated with measures of human capital,

which is consistent with the results by Eaton and Kortum (1996) and Xu (2000).

In these three papers, the measures of human capital have only a quantity

dimension, the average number of years of schooling or school enrolment in the

population. Hanushek and Kimko (2000) have recently argued that the quality

46 Keller (1996) presents a model of absorptive capacity in a growth context.

41
dimension of human capital is at least as important. Their results using

standardized science and engineering test scores for around thirty countries

seems to bear this out. I expect that as test score data becomes available for a

larger set of less developed countries, it will be able to show that science and

engineering skills are important in facilitating technology diffusion.

Griffith, Redding, and Van Reenen (2000a,b) have recently emphasized

the importance of indigenous R&D to facilitate technology diffusion from abroad

(see also Kinoshita 2000, discussed in section 4 above). Griffith, Redding, and

Van Reenen (2000a) use industry-level data from twelve OECD countries for the

years 1974 to 1990 to study what are the main determinants of productivity

dynamics in this sample. The authors construct a productivity gap measure,

defined as TFP relative to TFP in the leader country; this is a measure of the

potential for productivity catch-up. Griffith, Redding, and Van Reenen (2000a)

find that subsequent TFP growth is negatively related to the productivity gap,

which is consistent with productivity convergence. If the productivity gap

variable is interacted with R&D, the authors estimate a strong negative

coefficient. This is consistent with absorptive capacity being empirically

important, because it says that catch-up is particularly rapid if there are

substantial R&D investments in low-productivity industries.47

I now turn to a summary and some concluding remarks.

47These authors also find that interacting human capital with the productivity gap leads to a
smaller effect.

42
9. Summary and implications

It is evident from my discussion that the literature that empirically

quantifies the effects of international technology diffusion is a fairly recent one.

While we know today much more than we did merely a couple of years ago, there

are only few results that are solidly established at this point. To date, different

strands of research on a particular topic give seemingly or actually conflicting

answers; some of the results that I have reviewed above might still be overturned,

and many important topics have not been considered yet at all. Nevertheless, I

will try to draw some general lessons from what we know right now.

In general, there is a substantial amount of evidence that underlines the

importance of international technology diffusion for growth and development.

Once authors allow for technology to be either of domestic or international

origin, I am not aware of studies that did not find international sources to be

important.48 The evidence so far suggests that the relative importance of foreign

sources for productivity growth is decreasing in size and level of development. It

is probably no exaggeration to believe that the relative importance of foreign

technology in most less developed countries is at least 90%, and probably higher.

At the same time, there is no indication that international learning is inevitable or

48
Does this matter relative to analyses that emphasize differences in the endowment with quality-
adjusted capital (Mankiw 1995) or in policies towards technology adoption (Parente and Prescott
2000)? It is true that at a given point in time, the process of international technology diffusion
must manifest itself in cross-country technology differences, which translate into income
differences. That all approaches will in the end lead to some statistics in the national income
accounts is not surprising—after all, each of them tries to explain GDP. The important questions
are rather: which framework is helpful for thinking about productivity growth, and which is useful
to guide economic policy towards raising productivity growth.

43
automatic, merely a function of what Gerschenkron (1962) has called economic

backwardness. Instead, differential learning effects seem to be in part explained

by the extent and the way in which firms of different countries engage in

international economic activities. What is the evidence on this so far?

International trade has been a suggested as a major channel for technology

diffusion early on. I think that the refinements of R&D spillover regressions in

response to the papers by Coe and Helpman (1995) and Keller (1998) now point

to a robust link between imports and technology diffusion. This evidence is

strengthened by results from relating patent citations to import patterns as well

as by estimating general equilibrium models of embodied technology diffusion.

While the evidence using micro data is much weaker, especially on learning

effects from exporting, my sense is that at least qualitatively, trade facilitates

international technology diffusion. Some results, for instance by Lumenga-Neso,

Olarreaga, and Schiff (2001), indicate that there might be much to be learned

from future work that studies the full dynamics of trade and technology diffusion

instead of only the long-run stationary relationships.

On FDI as a mechanism of technology diffusion, the results so far are

mixed. The result that FDI does not necessarily lead to strong positive spillovers

is a sensible one. After all, a cornerstone of the theory of FDI says that firms

choose to operate through a fully-owned subsidiary instead of through joint

ventures or technology licensing because FDI helps to keep the private return to

technology investments internal to the firm—that is, no leaking out of knowledge.

44
 In general, the evidence for positive effects from inward FDI is stronger for

more developed than for less developed countries. This might have to do with the

fact that outsourcing of relatively low-skill activities is more likely for North-

South FDI than for North-North FDI (e.g., Hanson, Mataloni, and Slaughter

2001). The former could have a lower learning potential than the latter, not

necessarily because the activities are different as such, but because they are

integrated with the host country economy to different degrees (in terms of

backward and forward linkages).49 At any rate, the fact that the only study of

those discussed above finding positive effects from inward FDI in a non-OECD

country is one where firm-level data on R&D is available--Kinoshita (2000)--

suggests that local effort in adopting advanced foreign technology is very

important.

Other mechanisms such as person-to-person communication have in my

view not been analyzed to a sufficient degree yet. In part, this seems to have to do

with a paucity of relevant data. This channel is also difficult to separate from

trade and FDI, because the ease of communication is affecting the likelihood of

trade relations, for example. To some extent, the relatively large contribution of

trade and the smaller contribution of communication estimated in Keller (2001b)

might simply reflect that trade is a more proximate correlate of international

technology diffusion than communication is.

49 The processing plants along the U.S.-Mexican border (maquiladoras) might be a good example
of FDI with relatively few backward and forward linkages.

45
 The literature on technology spillovers has moved increasingly away from

single-channel analyses to multiple-channel analyses, or at least to work that

simultaneously controls for overall (not-further-specified-) spillovers. To analyze

multiple channels especially in the context of a fully-specified general equilibrium

model is not easy, but I believe that the returns from doing this would be high.

There are a number of results suggesting that the strength of technology

diffusion across different sets of products varies: for certain types of high-tech

products, international technology diffusion could easily be two or three times as

strong as for the average manufacturing good, ceteris paribus. However, it is also

true that price deflators for R&D-intensive products are, due to fast-rising

product quality, particularly hard to calculate. While it is plausible that active and

passive spillovers associated with high-tech products are larger than those

associated with lower-tech products, a part of the estimated difference might be

spurious.

The question to what extent foreign technology diffuses throughout the

domestic economy, or affects only a small segment of it is a subject that deserves

further analysis. As the recent debate on whether advances in ICTs have raised

the structural rate of growth in the U.S. and elsewhere has begun to illustrate, the

optimistic view about future productivity growth very much depends on

economy-wide diffusion. The result that there are FDI spillovers in

technologically proximate areas--outside of the narrowly-defined FDI industry

itself--by Girma and Wakelin (2001) and Haskel, Pereira, and Slaughter (2001) is

interesting in this context.

46
 Work on the level of geographic localization of technology diffusion has

begun to shed light on whether technology diffusion is a force towards

convergence or divergence. It would be useful to extend this analysis to a broad

set of countries, which would allow to forecast what will happen to the world’s

distribution of income. The same is true for the result by Keller (2001a,b) that

technology has become less localized. It is important to find out whether that has

happened only among OECD countries, or also in a broader set of countries: has

technology become increasingly global, or merely more common among the

relatively rich countries?

We also know very little right now about what are the primary causes that

have led to this lower degree of knowledge localization among OECD countries.

Learning more about these causes is important for thinking about what kind of

policies might be effective in fostering the diffusion of technology from abroad.

Other important issues include the following. First, empirical studies of

international technology diffusion provide to some extent different results

because of conceptual and measurement differences. One important issue is how

narrow or broad the concept of knowledge diffusion is. Patent citations are the

narrowest measure that has been used, which is followed by patents or patent

applications per se. A broader notion of technology diffusion is implicitly utilized

by studies that infer international technology diffusion from the relationship

between foreign R&D and productivity. The least narrow notion of technology

spillovers is implied when some measure of international economic activity is

47
related to productivity (e.g., the share of foreign-owned employment in total

employment in much of the work on FDI spillovers).

The best measure of spillovers in the sense of an externality is probably a

patent citation. All other measures might pick up also market-based technology

transactions (such as royalty payments and licensing fees) and, probably more

importantly, the outcome of changes in the competitive position of firms. These

effects are not externalities, and they might have different welfare implications.

However, a well-known problem of using patent statistics—both applications and

citations—is that technological knowledge is not all patented (Griliches 1990

provides a broader discussion). This could be because applying for a patent, or

citing another patent, is a strategic decision of the firm. Even if this is not an

issue, as long as a large part of knowledge is tacit, patent statistics will necessarily

miss that part, because codification is necessary for patenting to occur.50

Thus, while some approaches to identify technology spillovers capture

more than the pure externality effect, patent statistics might capture less than

what we are interested in. Because a clearly dominating measure to identify

technology diffusion is not available, there are good reasons for applying different

approaches, as long as the relative advantages and disadvantages are recognized.

50 It is also worth keeping in mind that the number of patent applications differs across countries

because the propensity to patent seems to differ across countries. For example, Eaton and Kortum
(1996) scale down the number of Japanese patents by a factor of 4.9 for this reason, an approach
that is widely used in the literature. The value of 4.9 is based on a 1992 working paper by Okada.

48
 Second, a promising development for future empirical work on

international technology diffusion is the increasing availability of large micro

(firm or plant) level data sets. At times, there are sometimes exaggerated

expectations. Micro-level data allow avoiding composition and aggregation biases

that are often present in industry- and aggregate-level analysis. Other issues

seem to be becoming even more pressing at the firm-level, such as the

unavailability of price deflators. And to interpret a cross-sectional correlation of

foreign ownership and productivity as evidence for FDI spillovers would be just

inappropriate at the firm level as it is at a more aggregate level. As the studies

discussed above indicate, however, micro-level data can help to take a major step

forward. The biggest contribution of micro-level data sets comes in my view from

a better estimation of micro behavior, as the data records the outcome of

economic decisions right at the decision-taking level. Empirical micro studies of

technology diffusion that reach their full potential involve probably modeling the

micro behavior as well.

Third, the evidence reviewed above indicates that micro-level studies paint

often a more pessimistic picture on the strength of learning externalities through

international economic activity than industry-level or aggregate studies do. This

could be because the former avoid certain biases (see above); it might also have to

do with the fact that data on the learning effort of host country firms has typically

not been available. A third reason could be that micro-level studies so far are not

based on a framework that explicitly allows for learning and spillover

externalities between firms. That is, so far the micro evidence is based on ‘no-

49
externality’ models. Future empirical work will hopefully employ models where

the presumed learning effects from international economic activity exist as a

matter of theory. At the same time, the empirical analysis should avoid picking up

spurious effects.

What are the policy implications of this literature? The evidence is not

strong enough yet to provide support for specific policy measures, such as a

particular subsidy to a multinational enterprise for locating in a country. This

would require more agreement on quantitative effects than there is right now. At

this point, the results suggest that the international dimension of technological

change is of key importance for most countries. In this situation, a closed-off

international economic regime must have detrimental welfare consequences for a

country.

There is also evidence that the relative importance of the international

technology diffusion has been increasing with the level of economic integration in

the world. This suggests that the performance advantage of outward-oriented

economies over inward-oriented economies will be higher in the future than it is

today. What if future research were to establish that international technology

diffusion raises productivity more in advanced than in less developed countries?

The implication for less developed countries would not be that a turn towards

autarky is beneficial--on the contrary, given the evidence on positive productivity

effects from international technology diffusion. Rather, if the benefits from

50
operating in an international economic environment differ across countries, this

suggests to investigate further the major reasons for this—what works, and why?

While there is no consensus yet on the exact magnitude of spillover

benefits, it is clear that well-functioning markets and an undistorted trade- and

foreign investment regime are conducive to these learning effects. However, the

evidence suggests that the latter are quite difficult to pin down. For one, it does

not seem to be primarily a matter of simply specializing on high-tech goods.

Rather, the goods characteristics are only part of what is important. India, for

example, aimed at producing relatively advanced products during its era of

import substitution policy, but their quality was low compared to international

standards. In contrast, South-East Asian countries such as Hong Kong and South

Korea were initially specializing in relatively low-tech products, and moved

successfully into the range of higher-tech products only gradually.

Instead, technological knowledge spillovers appear to be resulting from a

deliberate commitment to learning and matching international performance

standards through ongoing interaction with foreigners. Local efforts are clearly

necessary for successful technology adoption as well. At the same time, the

ongoing interaction with foreign firms and consumers seems to be a process of

knowledge discovery for firms that cannot be had from interacting only with

other domestic firms. To model as well as empirically capture these in a

convincing way continues to be a challenge.

51
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