Modern Economy, 2010, 1, 80-88
doi:10.4236/me.2010.12008 Published Online August 2010 (http://www.
Copyright © 2010 SciRes. ME
How to Reap the Induced Technological Bonus?
A Mechanism and Illustrative Implementation
Gouranga G. Das*
Department of Economics, Hanyang University, Seoul, South Korea
Received June 17, 2010; revised July 19, 2010; accepted July 23, 2010
Exogenous technical progress can have uneven impacts on productivity contingent on absorptive capacity,
structural congruence and trade intensity. The paper illustrates the role of enabling behind-the-border factors
for effective absorption and is pertinent for discussing issues like ‘Europe 2020’or Lisbon strategy for inclu-
sive growth. Drawing on our model, we illustrate that the capture-parameter is the propellant force for effec-
tive assimilation of foreign technology of recent vintage. The capture parameter is the outcome of endoge-
nous decision-making process. The ‘productivity bonus’ mechanism leaves room for changing the results via
skill-mix composition. However, it awaits implementation in a large-scale economy-wide modeling frame-
work for further extension.
Keywords: Trade, Technology Spillover, Capture, Productivity, Congruence
1. Introduction
Of late, with the rise to dominance of new endogenous
growth theory the role of international trade and foreign
direct investment (henceforth, FDI) in facilitating trans-
border technology flows and consequential rise in pro-
ductivity can no way be underestimated. The role of in-
ternational trade in transmission of technological benefits
via traded intermediate inputs has been discussed at
length in the literature—see Keller [1], Eaton and Kor-
tum [2,3], Coe, Helpman and Hoffmaister [4,5]—to
name a few. Participation in international trade provides
a variety of benefits to developing countries through re-
source allocations according to comparative advantage,
exploitation of economies of scale, increased capacity
utilization and technology upgradation-to name a few.
Upsurge in technology-intensive products is well-docu-
mented in the literature (Keller [1]; World Development
Report [6], World Bank [7]; Connolly [8]; Coe et al. [4];
Guerrieri and Milana [9]; Hoekman and Javorcik [10];
Das [11-13]). In the literature of technology spillover,
the importance of absorption capacity (AC) and struc-
tural similarity (SS) in appropriation of technological
benefits has been discussed (Cohen and Levinthal
[14,15]; Nelson and Pack [16]; Evenson and Westphal
[17]; World Development Report [6]). According to the
World Development Report (World Bank [6] (henceforth,
WDR) trade facilitates technology flows. WDR (1999)
has documented evidences of acquisition of the knowl-
edge capital with particular emphasis on the role of AC
for knowledge diffusion. In fact, WDR (1999) reports
even a follower country needs a labour force with a
relatively high level of technical education, especially
when technologies are changing rapidly” (see p. 42,
Also, for closing ‘knowledge gaps’ between the techn-
ology creator and the recipients it emphasized the crucial
roles of (see p. 25):
1) “Acquiring and adapting global knowledgeand
creating knowledge locally;”
2) “Investing in human capital to increase the ability to
absorb and use knowledge;”
3) “Investing in technologies to facilitate both the ac-
quisition and the absorption of knowledge.”
Development of AC is important for effective diffu-
sion of technology as it encompasses the “ability to imi-
tate new process of product innovations, [and] to ex-
ploit basic research.” (Cohen and Levinthal, [15]).
Nelson [18] defines AC as
the ability to learn and implement the technologies
Comments of an anonymous referee is appreciated. With the usual
disclaimer, the author is grateful to Professor Alan Powell. I acknowl-
edge the support of the Faculty of Applied Economics, University o
Antwerp, Belgium under Erasmus Mundus Visiting Scholar Pro-
gramme of the European Commission during May
August 2010.
Copyright © 2010 SciRes. ME
and associated practices of… ...developed countries.”
Nelson and Pack [16] argues that
to learn to use new technologies and to function ef-
fectively in new sectors required the development of new
sets of skills, new ways of organising economic activity,
and …. [becoming] competent in new markets” [and also]
“to be sure, adopting technologies of the advanced
countries required, among other things, high rates of
investment in physical and human capital...
We offer a stylized model formalizing the nexus be-
tween embodied technology transfer, human capital and
TFP Growth. AC is defined in terms of skill intensity of
the labor force (Das [12]; Meijl and Tongeren [19]). SS
of two sectors will be judged by the similarity of their
capital intensities, for example, by physical capital per
unit of effective labor. SS involves comparison of struc-
tural characteristics of a sector in the source of techno-
logical change and those in the destinations; the idea is
that the technical knowledge in the advanced economies
will be most ‘appropriate’ to the clients closest to them
in terms of their primary factor intensities. Our over-
arching theory focuses on the sector-specificity of the
capture parameter (CP) determined by AC, SS and trade
intensity (TI). The model developed is specifically de-
signed for illustrative simulation of a technology shock.
Section 2 rationalizes. Section 3 models. Section 4 nu-
merically illustrates. Section 5 concludes.
2. The Rationale
Most of the relevant papers in the new growth literature
deal with non-convexities in production and dynamic
gains from trade between trade partners.1 The integration
of new growth theory and trade theory à la Grossman and
Helpman [21] and other researchers (mentioned above)
places the emphasis on induced endogenous technical
change and scale economies. Typically, most of the
models assign a more prominent role to ‘technological
change’ as an explanator for varying growth episodes
across nations.
Lucas [22,23], however, is a tour de force in this genre
of growth models where the role of human capi-
talmodelled via schooling and formal education as
well as learning by doing and on-the-job-traininghas
been given due importance. Kosempel [24] also modeled
such interaction. In fact, Lucas [23] argues
By assigning so great a role to ‘technology’ as a sou-
rce of growth, the theory is obliged to assign correspond-
ingly minor roles to everything else, and so has very little
ability to account for the wide diversity in growth rates
that we observe.
Lucas [22] argued that, although they started from al-
most entirely comparable bases, South Korea experi-
enced a ‘growth miracle’ whilst the Philippines had an
episode of ‘growth failure’ between 1960 and 1988; ac-
cording to him,
The main engine of growth is the access to human
of knowledge
and the main source of differe-
nce in living standards among nations is the difference in
human capital. Physical capital accumulation plays an
essential but decidedly subsidiary role.
Using a “bottoms-up” approach, we focus not only on
the firm’s attainment of a least-cost input combination,
but also on technology transfer-induced endogenous ch-
anges in productivity. The vital elements in the latter are
skilled labor intensity (measuring AC), physical capital
intensity (proxying SS), and the trade intensity (TI, of-
fering the opportunities for capturing a technological
bonus). As shown below, for a sector “CP” is an amal-
gam of AC, SS and TI. In the context of European Un-
ion’s enlargement efforts to give accession to lower-tier
countries, this issue is pertinent. SS encapsulates social
capital and effects of physical capital amalgamated into
one ‘catch-all’ factor for ease of expositional conven-
ience. According to Dasgupta [25], TFP binds both tech-
nology and socio-economic institutions. Sen [26] as-
cribes important role to lack of social and physical infra-
structure. In a simple set up, the model purports to show
the mechanism of three pillars for cooperation between
high-tier and low-tier economies—a lesson useful from
the EU’s enlargement perspective (not discussed for par-
simony and different focus of current analysis).
A representative firm reaps the benefits of technologi-
cal improvements embodied in imported inputs. It needs
higher level skills to harness the benefits of technological
improvements. At the macro level, given the overall hu-
man capital stock and structural congruence with the
trading partners, the regions participate in trade and reap
the technological bonus (TB) out of trade flows (see Ce-
tin and Cincera [27]). Of course, at a given intensity of
trade flows, a higher bonus may be achievable if the skill
intensity of the work force is higher, which may partially
motivate building up additional skills. At the level of a
sector, the question is to find out the “optimal” level of
skilled labour for a sector so as to make the best use of
the “TB” obtainable from trade-mediated technology.
Even though the firm chooses an optimal input mix,
technical progress in the foreign source is an exogenous
phenomenon. This induces a sectoral bias into technical
change as skilled labour will have an advantage in ex-
tracting the “TB” from spillovers.
Based on the theoretical insights, we adopt a neo-clas-
sical growth framework. Let us consider an economy that
produces a single homogeneous good “Yt” (output or
GDP, synonymously) using composite (i.e., skilled and
unskilled composite) labor (L), domestic capital or gross
domestic capital formation, GDI, (KD) and foreign capi-
tal of FDI (KF) so that the aggregate Neoclassical well-
behaved production function is written as:
1See for example, Das [14,20], Grossman and Helpman [21], Evenson
and Westphal [18].
Copyright © 2010 SciRes. ME
tttt K,K,LFAY (1)
where “At > 0” is an index of technological progress (pa-
rameter) representing Total Factor Productivity (TFP)
index or Hicks-neutral technical progress.
Also, aggregate composite capital stock, F
tt KKK
Subscript “t” refers to unit of time. However, for sim-
plicity we suppress the regional subscript for each coun-
try j.
Assuming linear homogeneity (constant returns to
scale), this production function can be expressed in per
worker (intensive form) terms as:
ttt k,kfAy (2)
where lower case letters represent per worker values of
the corresponding variables. Note that yt is the productiv-
ity per worker in period t.
Assuming log-linearity and taking a total differential
of (1), we derive the following expression for growth-
accounting relation as:
tk/kk/kA/Ay/y  (3)
In (3), generically xdt
is the time rate of
change of variable x or the growth rate.
The above expression shows that the growth-rate of
per capita GDP depends on the growth rates of FDI and
GDI intensity per worker and the rate of TFP growth. It
is to be noted that the TFP changes, being influenced by
shares of FDI and GDI in aggregate output, occur endo-
genously to escalate the growth in per capita GDP. Un-
der perfect competition in product and factor markets,
the coefficients are the corresponding output elasticities
(equivalently, factor cost shares of foreign and domestic
capital in per capita terms) of FDI and GDI per capita (in
terms of growth rates).
The implication of this model is that since at higher
level of capital stock, it will be subject to diminishing
returns, the countries with lower level of productivity
will experience a higher growth as a result of increased
FDI. On the other hand, for the advanced countries the
growth of productivity will be slower. Thus, this model
suggests that the productivity differential across coun-
tries will be smaller owing to FDI-induced foreign capi-
tal inflows. The convergence of growth rates is in line
with the catch-up hypothesis put forward for the newly
emerging and rapidly industrializing economies of East
and South-East Asia. This has important bearing for the
EU’s integration effort with potential and candidate
member states with lack of appropriate constellation of
enabling factors (Shankar and Shah [28]). With sufficient
human capital and skill formation, a country will have
ample opportunity to break this diminishing returns and
hence, will be able to reap spillover benefits via harness-
ing the technologically sophisticated capital goods or
imported input embodying superior state-of-the-art. Thus,
“k” in the above stylizations could be interpreted broadly
to encompass human capital or knowledge-capital of
superior quality. As Pack and Westphal [29] argued,
effort is required in using technological information
and accumulating technological create
new technology. This takes the form of investments
in.….effective use of knowledge.
In what follows, we just present an illustrative analy-
tical model to show the role of human capital intensity to
absorb sophisticated technology, assuming that physical
capital intensity does not hinder the growth process.2
3. A Model of Productivity Bonus3
Newer technology embodied in traded goods demands its
own types of skills. The profile of skills embodied in the
workers interacts with other inputs and the available state
of the art to determine the TFP. The underlying assump-
tion is that workers differ in the appropriateness of their
skills to achieve any given productivity level with a par-
ticular vintage of technology. Competition ensures that
each labour type is paid according to its marginal prod-
The incentive of reaping a technological bonus from
embodied spillovers modifies the representative firm’s
choice of an optimal occupational mix. Thus, the bonus
hypothesis is: the representative firm, in the process of
maximizing profit (or minimizing costs), takes into ac-
count the benefits of technological improvements em-
bodied in imported intermediate inputs. Capturing these
benefits requires an appropriate mix of skilled and un-
skilled labour, which is recognized by the representative
firm in its production decisions. The benefits available,
moreover, depend positively on the structural similarity
of the source and the recipient (as measured by the ratio
of capital to quality adjusted labour). Technological im-
provement is exogenous in this theory which is restricted
to the propagation of technology. We assume that for a
sector “Bonus Embodied Spillover of Technology (BE-
ST)” is achieved in consonance with the representative
firm’s static optimization exercise: firstly, three variables
viz., sectoral skill intensity, structural congruence and
trade intensity in production of the sector combine to
produce a capture-parameter. This subsequently trans-
forms the potential productivity improvement into an
actual productivity bonus—BEST—accrued via the tra-
ded intermediates. Figure 1 shows the transmission me-
chanism behind the productivity bonus.
The production function is generically written as:
2This version of the paper is based on Das [30] with substantial altera-
tion and improvement on the in-house version being incorporated
based on feedbacks from Professor Man-Soo Joo.
3Derived from Das [30].
Copyright © 2010 SciRes. ME
YfunctionMMLL (4)
where Y: output,
MF: imported material input,
MD: domestic material input,
LS: skilled labour input and
LU: unskilled labour input.
M: composite (aggregate) materials of MF and MD.
V: Value-added composite of primary factors.
Skill intensity
capacity of
Sector j in region s
Trade intensity of
intermediate input i
used by Sector j in
region s
Scaled Magnitude of
Capture Parameter
Structural congruence
between regions r and
s in Sector j
BEST for Sector j
in region s
(BEST.. js)
Aggregation over all ‘i’
and ‘r’
Bonus Embodied Spillover of
Technology via imports of
intermediate good i from region r
to sector j in region s (BEST
change in Sector
i in source r
Capture Parameter
for technological bonus
captured by sector j in
region s via imports of
commodity i from region r
Figure 1. Principal pathways underlying the mechanism of technological bonus capture by sector j in region s.
Copyright © 2010 SciRes. ME
Assuming the production function Leontief (at the top
level) in M and in value added measured in efficiency
units, bV:
Y = Min {M, bV} (5)
(1- )
M = M M
(1 )
V = LL
b = f g (8)
lnf = h(ln[])
M (9)
ln g = H(ln[])
L (10)
h,H> 0 (11)
h', H' > 0 (12)
The function b in (8) allows for changes in TFP via
two intensity ratios, the import intensity of material in-
puts and the skill intensity of labor, entering multiplica-
tively. The optimization problem facing the representa-
tive perfectly competitive firm is formalized as:
Maximize Y with respect to MF, MD, LS, LU,
subject to: (13)
FDD SSUUC = P M + P M + WL + W L (14)
where C is the cost of inputs, while PF, PD, WS, and WU
are the prices of the inputs. Note that PF, PD, WS, and WU
are all exogenous. C is a real anchor in this constant-ret-
urns-to-scale world and hence, is set exogenous.
Taking a monotonic logarithmic transformation, max-
imize Y subject to:
lnln {}FF DD SSUUC P MP MWLW L 
Since (5) is non-analytic, we invoke the (Leontief) re-
striction (18) below; as a second constraint in the La-
ln lnln lnYM b V (16)
ln(1) ln
lnln(1) ln
bL L
 
(lnln)(lnln )
ln(1) ln
 
Form the Lagrangean:
ln(1) ln
[ (lnln)(lnln)
ln(1) ln]}
L= M M
 
{ln ln[]}
 
The first-order conditions [other than the constraints
(15) and (18)] are:
ln FF
 
(1 )(1 )'/0
ln DD
  
ln SS
   
'(1)/ 0
ln UU
 
Adding (22) and (23) yields:
 (where SS UUWLWLWL
) (24)
Adding (20) and (21) yields:
 (where
Solving (20) through (23) for the input shares, we ob-
/{(1) '}/FFPM Ch
  (26)
/{(1)(1) '}/DDPM Ch
  (27)
 
/{'(1)}/ '(1)UUWL CHH
 
The left-hand sides of (26) through (29) add to unity,
while the right-hand sides add to 1/; hence
. (30)
Using (30) in (24),
 = the share of labour in cost
Denoting the cost shares of the four inputs by SF, SD,
SS, SU, from (30) and (26) through (29) we see:
 (32)
(1 )'
MLSShS  (33)
(' )SLSH S
(1' )ULSHS
The quantity component of the shares is determined
[via (5)] by output. That is:
= W bV/C
S (36)
The value-added price index W is
Copyright © 2010 SciRes. ME
(1 )
W = bL L
Similarly for materials:
= M/C
= Y/C
where composite material prices is given by:
(1 )
P =
4. Numerical Illustration4
4.1. The Data and Parameter Setting
Our analytical model developed above indicates that se-
veral inferences could be drawn from patterns of changes
in the system. Thus, we perform some numerical simula-
tion to show the impact of a technology shock (TFP) on
the productivity improvement. The problem is ap-
proached in a partial equilibrium set up to see what type
of changes prevails in the model. We illustrate the me-
chanism on the basis of a hypothetical data set with ad-
missible values-presented in Tables 1 and 2. We have
assigned admissible values to the parameters of the mod-
el, α and β. Tables 1 and 2 present the specific initial
settings or base-case scenario.
The base-case scenario in Tables 1 and 2 is a solution
of the share Equations (32)-(35) above. The impact of
TFP improvement on endogenous productivity enhance-
ment is traced via changes in “b” in the wake of several
perturbations as specified in the experiments.
4.2. TFP Simulation
We simulate the effect of 5 and 10 percent TFP shock.
Following the perturbation, the changed initial configu-
rations of the variables are given in Table 3.
The 10 percent Hicks-Neutral shock is represented by
the 10 percent increase in ‘b’ (2.724/2.4764 = 1.10) be-
tween Tables 1 and 3. As this shock is factor-neutral by
nature, it affects the ‘size’ of the composite value-added
whilst the composition of value-added (measured in con-
ventional units) remain unaltered. Thus, because of Hic-
ks-Neutrality skill-unskilled labour ratio between Tables
1 and 3 (4/8 = 0.5 = 3.739/7.478) remains unchanged.
With fixed cost and prices kept fixed at the original level,
the TFP improvement translates into a fall in the value-
added measured in conventional units—compare the
values for “V” in Tables 1 and 3—implying each pro-
ductive factor inputs are required in less amount in
physical terms. With cost being held fixed and given no
change in the relative prices in the post-shock scenario,
as V falls M has to increase to satisfy the constraint for
fixed cost. Comparing the last column in these two tables,
we infer that in quality-adjusted term, however, real val-
ue added increases. This is because the level of produc-
tivity bonus [i.e., value of “b”] is augmented from 2.48
to 2.72. This, in turn, increases the effective value- added
[i.e., “bV”]. Following the Leontief fixed-coefficient
technology at the top-most level, the usage of composite
material inputs goes up by the same magnitude as ‘bV’
see third column in Tables 2 and 3. Also, gross output
[Y] increases by about 2.8 percentsee fourth column
in Tables 1 and 3 (15.439/15.014 = 1.028). Results for
5% shock could be explained analogously; however, as
Table 1. Initial scenario for the representative firm.
U b bV
8 19.664 15.014 15.014 6.063 4 8 2.476 15.014
Table 2. Prices and Parameter setting for the representative firm.
D C[exogenous]
1 1 1 1 39.665 0.3 0.4
Table 3. Post-shock scenario for the representative firm and the impacts of TFP shocks.
Variables MF M
U b f g
10% shock 8.22620.221 15.43915.4395.6673.7397.4782.7241.50 1.65
5% shock 8.11619.952 15.23415.4395.8583.8657.7302.6001.50 1.65
4The discussion and arguments draws partly on the in-house version of the article in Research Institute of Digital Economics, Hanyang University,
Ansan. We need to report this to highlight the differences with other counterfactual simulations that we present below in details. However, this re-
roduction is for facilitating understanding of the theoretical insight via numerical example.
Copyright © 2010 SciRes. ME
conjectured the lower TFP shock reduces the capture and
the output compared to 10%-scenario. The sensitivity
analysis with respect to TFP shock does not alter the
direction of causality in the results. Keeping the skilled-
unskilled factor intensities and the foreign-domestic in-
termediate input intensities unaltered, we see that the
larger is the size of the TFP shock (i.e., 10% as com-
pared to 5%), the larger is the accrual of productivity
bonus (BEST). In other words, “b” augments from 2.60 to
2.72 in case of doubling the size of transmitted productiv-
ity shock. This motivates us to perform further scenario
analysis to examine how variations in the intensities of
factor usage in the presence of this TFP-augmentation (5%)
could inflate the productivity bonus.
4.3. Design of Counterfactuals and Numerical
We keep the productivity shock at 5% (we call it TFP-
base case) and consider the following scenarios:5
1) “L s” remains the same: in this case, we keep it un-
altered as in Table 1, Column 6 (that is, it is not reduced
as in Table 3, Column 7, TFP-base case). Thus, the con-
strained cost-minimization by the firm entails reduction
in Su, increase in Ss (and hence, in g via Equation (10)).
As “f” (via (9)) remains the same, bonus “b” increases to
2.60 (from 2.53) and Y goes up to 15.20 from initial base
case value of 15.01 (see Table 4, row 2).
Inference I: increase in skill-intensity improves AC
and leads to improvement of the productivity bonus de-
spite TFP shock being fixed at 5% level. Skill-intensity
is crucial for assimilating productivity benefits.
2) “Lu” is increased: to 10 so that skill intensity of the
firm falls. Constrained cost-minimization in the presence
of 5% TFP entails reduction of Ls and fall in material
input usage (MF and MD shrink) compared to both origi-
nal base-case and TFP-base case (see row 3, Table 4).
As expected, “g” and f fall (via Equations (9) and (10)),
causing the bonus “b” to dissipate. This leads to fall in
“bV” and “Y”.
Inference II: decrease in skill-intensity reduces AC
and leads to dissipation of the productivity bonus despite
the presence of TFP shock being fixed at 5% level. Also,
decline in foreign intermediate input intensity leads to
shrink in the productivity capture.
3) Foreign intermediate input (MF) is increased: here
traded intermediates is augmented whereas domestically
sourced input (MD) input is decreased causing, via the re-
presentative firm’s constrained-cost minimization choic-
es of factor inputs, share of materials to increase and sh-
are of value-added composite to fall (see row 4, Table 4).
This led to increase in “f” substantially whereas “g” re-
mained the same as in both the base-cases. It led to incr-
ease in the bonus capture (via (8)) and resultant increase
in final output “Y” (row 4, Table 4).
Inference III: increase in imported intermediate in-
puts embodying sophisticated technology increases trade-
mediated technology spillover and leads to rise in the
productivity bonus even with fixed 5% TFP shock and
same skill-intensity levels. Trade intensity is conducive
for reaping productivity bonus.
4) “Ls” is increased, while keeping Lu unaltered: in
this scenario, the representative firm’s optimization solu-
tion leads to increase in skill intensity (hence, in AC) wh-
ereas trade-intensity (f) remains almost the same. This
led to increase in Ss, bonus (b) and hence, in output “Y”
(see row 5, Table 4).
Inference IV: increase in skill-intensity enables to reap
the productivity bonus via assimilation of imported in-
termediate inputs embodying sophisticated technology.
This leads to rise in the level of final output even with
fixed 5% TFP shock and trade intensity.
5) “MF” is increased and “MD” is fixed at the original
base-value: in this case, we see that “f” increases (as trade
intensity goes up), but skill-intensity remains the same (g
is unaltered). This leads to rise in the productivity spillo-
ver “b” causing output “Y” to grow (see row 6, Table 4).
Table 4. Post-shock scenarios for the representative firm under different scenarios with 5% TFP shock (TFP-base case).
Variables MF M
U b f g
Scenario 1) 8.09 19.91 15.20 15.20 5.91 4 7.66 2.60 1.50 1.69
Scenario 2) 7.56 18.42 14.10 14.10 6.71 3.68 10 2.32 1.43 1.40
Scenario 3) 13.91 17.39 16.30 16.30 4.22 2.80 5.60 3.85 2.23 1.65
Scenario 4) 9.16 22.50 17.18 17.18 4.02 4.01 4 4.09 1.50 2.72
Scenario 5) 8.69 19.66 15.39 15.39 5.72 3.77 7.54 2.70 1.56 1.65
Scenario 6) 8.07 19.83 15.14 15.14 5.92 3.76 8 2.56 1.50 1.61
Original base-case 8 19.66 15.01 15.01 6.06 4 8 2.47 1.50 1.65
TFP-base case 8.12 19.95 15.23 15.23 5.86 3.86 7.73 2.60 1.50 1.65
5Original base case scenario is the one without any TFP shock. TFP-base case is the one with only 5% TFP shock. Since 5% and 10% TFP shoc
generates the same direction of causality of results, only size or the magnitude of impacts differ, in the context of these series of counterfactuals this
does not undermine our purpose. It is obvious that the higher doses of TFP coupled with those simulations would change the magnitude of accrual o
Copyright © 2010 SciRes. ME
Inference V: increase in trade-intensity enables to reap
the productivity bonus embedded in the imported interm-
ediate inputs containing sophisticated technology. This
leads to rise in the level of final output even with fixed
5% TFP shock and similar skill-unskilled labor shares.
6) “Ls” decreases, but “Lu” remains at the original
base-case value: in this counterfactual case, Ls decreases
so that Ss falls and hence, skill intensity declines. As Md
and Mf do not alter much, following the firm’s const-
rained cost-minimization exercise, “f” remains unalte-
red while “g” is reduced. Thus, the bonus magnitude “b”
shrinks compared to TFP-base case. But as there is initial
5% TFP improvement, this causes output “Y” to register
marginally higher level than the original base-case value
(compare row 7, Table 4 with row 8). This is lower than
TFP-base case as there is a fall in “g” following decline
of skill-unskilled ratio.
Inference VI: decrease in skill-intensity in the pres-
ence of unchanged trade-intensity causes less chance to
reap the productivity bonus embedded in the imported
intermediate inputs. In this case, rise in the level of final
output is induced by 5% TFP shock despite declining
skill composition and similar level of trade intensity.
All these inferences are instrumental in understanding
the working of the theoretical model developed in this
paper. The numerical illustration of the model confirms
our conjecture that trade, indigenous skill-induced adop-
tive capabilities as well as technological sophistication
are important forces for sustained growth and develop-
ment. All these three channels facilitate learning of
technologies of recent vintage. They mutually reinforce
each other to translate into higher growth of output.
5. Conclusions
This paper presents and numerically implements a theo-
retical model of endogenous capture of technical change
originating in the source of knowledge-creation (as-
sumed exogenous). Numerical simulation confirms that:
increases in the intensity of skilled labor in the input mix
improves the absorptive capacity of the work force; the
amount of technology captured increases with the import
intensity of the material inputs while technological
change is vehicled via foreign intermediates; increase in
both types of intensities complements each other to
augment the bonus capture; only technological change
cannot deliver the potential benefits unless the input
mixes are optimally chosen by the firm while making
cost-minimization decision. We have explored their ef-
fects in harnessing the trade-induced technology flows.
We show that capture-parameter is the propellant force
for assimilation of transmitted technology. Further work
along these lines will involve mounting the full scale
simulations in a higher dimensional model and integrat-
ing a dynamic aspect of R&D-creation and its propaga-
tion. This work has important implications for technol-
ogy policy and planning as well as for trade or regional
integration, for example, in the context of European Un-
ion’s accession program under Europe 2020 aimed at
social cohesion, competitiveness, skill formation, and
R&D (Shankar and Shah [28]). Often, the necessity of
political and social integration as precursor of successful
monetary union is stressed. A systemic view is warranted
for pursuing this objective. The model elicits heuristically
that technology policy, trade policy and macroeconomic
management needs a synergistic planning to achieve
sustained growth. Trade, per se, is insufficient for
achieving the growth dividends. Trade creates the op-
portunities for sustained development via industrializa-
tion and technology transfer; however, developing ade-
quate socio-institutional framework, educational attain-
ment and skill formations, inter alia, are necessary for
seizing plethora of opportunities.
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