Service-led industrialization in developing economies: Some implications of technology gap dynamics

Can expansion of modern-services such as telecommunications, banking & finance and business services boost industrialization in developing countries? We explore this question in a two-sector Kaleckian model where an autonomously growing service sector generates market for a demand-constrained domestic industry but the latter faces competition from technologically-superior imports. We show that it is possible to have a steady state in this model, where domestic industry grows at the same rate as the service sector with positive industrial employment growth. Convergence to this steady state, however, requires domestic industry to increase its rate of technical change in response to increasing import competition. We find that improvements in the conditions for technological progress in the domestic industrial sector, say because of policy interventions that helps in upgrading technology, can increase relative size of domestic industry. On the other hand, an increase in the pace of technological progress abroad or an increase in the elasticity of imports of industrial product with respect to technology gap between the domestic industry and its foreign competitor reduces the same.