“Technology, Trade, and Growth: A Unified Framework”

Jonathan Eaton and Samuel Kortum
IED Discussion Paper 110, January 2001

Considerable attention has recently been devoted to the links among innovation, technology, trade, and growth. This paper develops a theory of these links that suits itself to empirical implementation. It provides a common treatment of technology to address questions as diverse as explaining trends in productivity, patents, and R&D in the USA; the extent of technology diffusion among major research countries; the relationship between technology diffusion and trade; and finally, the relationship between productivity of individual producers and their ability to penetrate export markets. In earlier papers, the theory was augmented to capture the crucial features of the particular applications. In this paper, they present the most parsimonious framework to draw the connections between the forces driving innovation and productivity as well as the implications of technology for trade.

Their approach enables them to confront new issues. These include the effect of increased openness on research

incentives and growth and the role of scale effects and research activity on growth. While larger markets induced by opening the economy to trade may spur greater innovation, the greater difficulty – and hence, cost – in coming up with ideas that can successfully compete in a larger arena may discourage it. The model illustrates the possibility that these forces can exactly cancel each other. Hence, while market enlargement produces static gains from trade, there may be no dynamic gains forthcoming through the accumulation of technology. The authors find that lowering geographic barriers benefits countries with a smaller labor force disproportionately. Under frictionless trade, relative wages across countries only depend upon relative research productivities.

An exciting possibility for future work is the quantitative application of the model to capture the heterogeneity behind aggregate data. Eaton and Kortum point out that their framework can, for example, link data on aggregate productivity to international patent counts and data on aggregate trade flows to the export behavior of individual plants.