A Model of Technology Assimilation

What makes countries productive and rich? This paper endogenizes technology and total factor productivity (TFP) based on a model of technology assimilation. We consider an economy with a large stock of production ideas, where the factor requirements of ideas are different from its factor endowment. Firms can undergo an assimilation process which modifies ideas with respect to their factor endowment. The equilibrium level of TFP and the shape of the production function depend on the deep parameters that govern the assimilation power and the distribution of ideas. We apply the model to study cross- country income differences. Once foreign productive ideas are free to assimilate, there is symmetry breaking of the autarky equilibrium. Depending on the assimilation power, a laggard country can either catch up with the frontier countries (and their productive ideas) or fall into an assimilation trap with stagnant income. An advance in the world frontier technology polarizes the world economy. Finally, the model is used to study a number of challenging issues in growth and development, namely, the Lucas (1993) miracle, the "Twin Peaks" phenomenon of club convergence, the Flying-Geese Pattern of development, and the leapfrogging in technology.