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Technology gap

International trade theory

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  • 4 chapters

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Through United Nations

The theory assumes that the two countries have similar factor endowments, demand conditions, and factor price ratios before trade. The only difference is the technique. The technology gap exists between the time the new products are imported from external markets and the substitutes are created by domestic producers. Meanwhile, according to Ponser, the gap is constituted by three lags as follows:

  1. Foreign Reaction Lag: The time required for the innovative firms to produce the products with new technology, and these products will later be exported to external countries.
  2. Domestic Reaction Lag: The time taken by all domestic firms to continue producing relatively newer versions of products as to retain their shares in the global market, before they realize the threat of the new products imported. Within the period, there is also an imitation lag, which suggests the time the local entrepreneurs need to learn to adopt the new technology to make and sell substitutes.
  3. Demand Lag: The time that the domestic consumers need to acquire or adapt their tastes for the new products.

The total lag is calculated by subtracting the demand lag from the imitation lag. If the demand lag is longer than the imitation lag, then the domestic market will start to demand the foreign goods. The demand of imported goods overriding the domestic products will in turn leads to the erosion of the local market and deficit in the trade balance.

History

The development of an explicit technology gap model started with Ponser. The key for the theory is the rate of diffusion of technology. Moving on to 1966, Vernon further extended the technology gap model into the product life-cycle theory. The degree of maturity of the technology became the new key of the dynamic economic trade. Vernon's theory resonances with the technology gap theory. As Fig1. shows, at the new-product phase, the product is only produced and consumed in the innovating countries, usually the developed countries. But, as the product matures, the imitating countries, usually the developing countries, intervenes the market by underselling the products. The production of the product gradually gets standardized and the innovating countries can no longer monopolize the market.

In 1981, Pasinetti proposed a Ricardian comparative advantage model that emphasizes on the rate of innovation. Later, Dosi and his colleagues affirmed technology gap as the heart of absolute advantage in 1990. Moreover, Dosi et al. complicated the definition of diffusion, which makes a smooth diffusion process does not exist anymore. The new definition now writes as: the "process of learning, modification of the existing organization of production and, often, even a modification of products."

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