Why Doesn't Technology Flow from Rich to Poor Countries?

Abstract

What is the role of a country's …nancial system in determining technology adoption? To examine this, a dynamic contract model is embedded into a general equilibrium setting with competitive intermediation. The terms of …nance are dictated by an intermediary's ability to monitor and control a …rm's cash ‡ow, in conjunction with the structure of the technology that the …rm adopts. It is not always pro…table to …nance promising technologies. A quantitative illustration is presented where …nancial frictions induce entrepreneurs in India and Mexico to adopt less-promising ventures than in the United States, despite lower input prices.

Financing Ventures

“…Dynamic contract frameworks that focus on …rms, and venture capital in particular, are rarer. On this, Bergemann and Hege (1998), Clementi and Hopenhayn (2006), and Cole, Greenwood, and Sanchez (2016) develop contracting structures that share some similarities with the one presented here. In Bergemann and Hege (1998) a venture capitalist also learns about a project's type, good or bad, over time.…”

“…Cole, Greenwood, Sanchez (2016) focus on the impact that …nancial intermediation, more broadly de…ned, has on cross-country technological adoption and income levels. As in Akcigit, Celik, and Greenwood (2016), there is a distribution of competitive …rms operating in general equilibrium.…”

Entrepreneurship and Financial Frictions: A Macro-Development Perspective

“…Cole et al (2012), Lopez-Martin (2013), and Midrigan and Xu (2014) are examples of preliminary attempt to endogenize entrepreneurial productivity-modeled as the choice of technologies-in the presence of financial frictions, but this is an area where more research is certainly needed. At a very minimum, however, the modeling of capital in the production function captures some role of productivity-enhancing endogenous investment.…”

“…Clementi and Hopenhayn (2006) show a similar result for dynamic contracts under iid asymmetric information (moral hazard on the part of the entrepreneur). Cole et al (2012) analyze the case with persistent private information and costly state verification. Intermediaries have incentives to relax constraints over time, but the constraints dictate the types of technology and the growth paths that firms can choose.…”

“…private information. Cole et al (2012) consider the case with persistent, but partially absorbing, private information, where lenders have the option of paying a cost to verify these reports, as in Townsend (1979)'s costly state verification. Another aspect is that the constraint does not rely on the history of default.…”