Technology Development through Knowledge Assimilation and Innovation: A European Perspective

Technology Development through Knowledge Assimilation and Innovation: A European Perspective

Debora Di Caprio (Department of Mathematics and Statistics, York University, Toronto, Canada), Francisco J. Santos-Arteaga (Departamento de Economía Aplicada II, Universidad Complutense de Madrid, Pozuelo, Spain) and Madjid Tavana (Business Systems and Analytics Department, La Salle University, Philadelphia, PA, USA & Business Information Systems Department, University of Paderborn, Paderborn, Germany)
Copyright: © 2015 |Pages: 46
DOI: 10.4018/JGIM.2015040103
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Abstract

The current paper studies an endogenous growth model driven by the technological development level of a country, which conditions both its factor productivity and the financial investment decisions of agents. Heterogeneity in the level of technological development among countries may not only lead to temporal divergences in income and productivity levels but also to divergent growth paths and poverty traps for identical available technologies. The authors illustrate the structural instability resulting from differences in the technological development level of countries and the subsequent financial constraints arising from such differences. Consequently, a strong national system of innovation should prove vital to ameliorate the negative real effects that follow from a severe financial shock. The obvious and imminent implications regarding the expected evolution of the European Monetary Union are derived both formally and numerically.
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1. Introduction

The existence of a direct and reciprocal relationship between the real and financial sectors of an economic system should be understood and axiomatized by policy makers and managers at all levels within any organization, from a firm to a country. As a matter of fact, the existing link between finance and innovation was already recognized by Schumpeter in 1934. Similarly, Dosi (1990) and Aghion et al. (2005) have emphasized the considerable importance that the financial sector has for the technological development of countries. It should therefore be clearly understood that a robust financial system might play a fundamental role in smoothing macroeconomic shocks – by providing firms with the funds required to finance their innovation activities – when financial constraints become particularly relevant, i.e. during recessions, see O’Sullivan (2005). It seems plausible to assume that the flow of funds to a given country is conditioned by the repayment probabilities of the firms located within it. That is, private financial flows should be guided by a profit maximization motive on the side of investors that depends on the expected evolution of firms, which, at the same time, is determined by their level of technological development and its expected evolution. The explicit recognition of such a relationship and an analysis of its immediate consequences for a country should take place before any political or managerial decision affecting the innovation (and, as such, repayment) capacity of any country is implemented.

Consider the real side of an economy from a structural perspective. The economic growth literature has illustrated how the assimilation of the most advanced technological capital by less developed countries constitutes a growth mechanism requiring important amounts of both physical and human capital investment, see Aghion and Howitt (2005). In particular, the cumulative nature of the process governing the acquisition and assimilation of technological knowledge is widely recognized, see Mukoyama (2003), and the costs of learning a technology are known to be considerable, as shown by Jovanovic (1997). Education, while an important factor for growth, has been displaced by differences in total factor productivity among countries, for which education is only partially responsible, see Howitt and Mayer-Foulkes (2005) for a review of the literature on this topic. Even in the standard economic growth textbooks, see Aghion and Howitt (1999), Barro and Sala-i-Martin (2003) and Acemoglu (2008), knowledge is not assumed to flow immediately among agents and countries, but to diffuse following an endogenously determined sigmoid accumulation function. The complex nature of technology and its diffusion dynamics have already been studied by, to cite a few, Silverberg, Dosi, and Orsenigo (1988), Chiaromonte, Dosi, and Orsenigo (1993), and Patel and Pavitt (1998), who described the existence of divergent technological gaps among developed countries. At the same time, the business cycle literature has highlighted the importance of investment specific technological innovations as the main source of output growth through the cycle, see Greenwood, Hercowitz and Krusell (1997). Such a phenomenon implies the need for specialized capital in production, which builds on the knowledge already existing in the innovator country. Thus, imitation requires highly specialized physical and human capital in order to achieve the same factor productivity as the innovator country.

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