Optimizing international technology diffusion: A middle-income country's perspective

The paper develops a North-Middle-South model to formulate a middle economy that plays catch-up via imitative R&D to acquire newer technologies from a higher-wage innovative forerunner, while playing “reverse catch-up” via outbound FDI to transfer older technologies to a lower-wage follower. A critical policy dilemma facing the middle economy is how to balance its R&D-driven technology inflows against its FDI-driven technology outflows. Numerical simulations are used for dynamic welfare analysis. This paper finds that tightening FDI permits the middle economy to keep a lower saving rate without weakening its ability to acquire newer technologies in the long run.