Why Are Developing Countries so Slow in Adopting New Technologies?

Norman Loayza (), Facundo Piguillem and Raphael Bergoeing

No 779, 2009 Meeting Papers from Society for Economic Dynamics

Abstract: We analyze the process of technological innovation from the perspective of developing countries. Specifically, we explore how developmental and regulatory impediments to the process of resource reallocation and firm renewal limit the ability of developing countries to adopt new technologies. First, we study how the availability of personal computers and incidence of internet usage --as proxies for technological progress-- are related to regulatory freedom, governance, and schooling in a large cross-section of countries. We find that these characteristics not only exert an independent effect on technological innovation but also complement each other in this regard. We then build a stochastic general equilibrium model with heterogeneous firms subject to idiosyncratic shocks. Technological innovation is modeled as adoption of exogenous productivity shocks requiring firm renewal. Then, we analyze the independent impact of developmental and regulatory barriers and the complementarities of their effects on firm dynamics and the process of technological adoption. As expected, when the process of firm dynamics is undistorted, firms quickly incorporate the advances from shocks to the technological frontier. However, when government-imposed regulations deter the ongoing process of firm destruction and creation, then technological adoption becomes sluggish and the economy fails to generate enough growth to close the developed-developing gap.

Date: 2009
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