North-South and South-South Trade-related Technology Diffusion: How Important Are They in Improving TFP Growth?

This paper examines the impact on total factor productivity (TFP) growth in the South of North-South and South-South trade-related technology diffusion. North-South and South-South trade-related R&D stocks are constructed based on industry-specific R&D in the North, North-South and South-South trade patterns, and input-output relations in the South. We explicitly control for endogeneity problems by using lagged independent variables and also control for effects on TFP growth from foreign direct investment (FDI). The main findings are: i) both North-South and South-South trade-related R&D stocks have a positive impact on TFP growth, ii) FDI also promote international technology diffusion, though the effects are smaller, and weaker; and (iii) the higher a country’s human capital, the larger the effects on TFP from North-South trade-related technology diffusion. We would like to thank Susan Collins, Caroline Freund, Daniel Lederman, Rodney Ludema, Will Martin, Keith Maskus, seminar participants at the World Bank and two anonymous referees for their useful comments. Special thanks go to Marcelo Olarreaga for his invaluable suggestions and comments