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Technology Diffusion, International Competition and Effective Demand - article ; n°1 ; vol.105, pg 23-46

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Revue d'économie industrielle - Année 2004 - Volume 105 - Numéro 1 - Pages 23-46
Ce papier étudie des questions relatives à trois caractéristiques de la croissance économique des années 80 et 90. Le papier développe un modèle d'économies intégrées (par le commerce et l'investissement direct international) qui vise à examiner ces caractéristiques précédemment notées. Il possède des traits schumpétériens et keynésiens en ce qu'il décrit les modifications de la répartition du produit qui accompagne les processus de diffusion des nouvelles technologies (l'émergence des rentes schumpétériennes) et discute les questions de demande effective soulevées par les modifications de la répartition et le processus de rattrapage.
This paper analyses a number of issues which were characteristic of the growth processes of advanced economies in the 1980s and 1990s : (i) there was an important diffusion process of a new general purpose technology (GPT); (ii) as a broad characterisation, one can say that the US took on the role as an « innovator » in introducing this GPT with Europe broadly following ; (iii) there was a speed up of catching-up of a sub-group of developing economies (South East Asian, later China and India) in an era of increasing globalisation ; (iv) both factors (i) and (iii) should in principle have given a boost to global economic growth ; however, for quite some time, it looks as if actual growth is in a more precarious state in advanced economies than in the earlier post-war period.
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Source : Persée ; Ministère de la jeunesse, de l’éducation nationale et de la recherche, Direction de l’enseignement supérieur, Sous-direction des bibliothèques et de la documentation.

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Michael A. Landesmann
Robert Stehrer
Technology Diffusion, International Competition and Effective
Demand
In: Revue d'économie industrielle. Vol. 105. 1er trimestre 2004. pp. 23-46.
Résumé
Ce papier étudie des questions relatives à trois caractéristiques de la croissance économique des années 80 et 90. Le papier
développe un modèle d'économies intégrées (par le commerce et l'investissement direct international) qui vise à examiner ces
caractéristiques précédemment notées. Il possède des traits schumpétériens et keynésiens en ce qu'il décrit les modifications de
la répartition du produit qui accompagne les processus de diffusion des nouvelles technologies (l'émergence des rentes
schumpétériennes) et discute les questions de demande effective soulevées par les modifications de la répartition et le
processus de rattrapage.
Abstract
This paper analyses a number of issues which were characteristic of the growth processes of advanced economies in the 1980s
and 1990s : (i) there was an important diffusion process of a new general purpose technology (GPT); (ii) as a broad
characterisation, one can say that the US took on the role as an « innovator » in introducing this GPT with Europe broadly
following ; (iii) there was a speed up of catching-up of a sub-group of developing economies (South East Asian, later China and
India) in an era of increasing globalisation ; (iv) both factors (i) and (iii) should in principle have given a boost to global economic
growth ; however, for quite some time, it looks as if actual growth is in a more precarious state in advanced economies than in the
earlier post-war period.
Citer ce document / Cite this document :
Landesmann Michael A., Stehrer Robert. Technology Diffusion, International Competition and Effective Demand. In: Revue
d'économie industrielle. Vol. 105. 1er trimestre 2004. pp. 23-46.
doi : 10.3406/rei.2004.3034
http://www.persee.fr/web/revues/home/prescript/article/rei_0154-3229_2004_num_105_1_3034Michael LANDESMANN and Robert STEHRER
The Vienna Institute for International Economic Studies WIIW
TECHNOLOGY DIFFUSION
INTERNATIONAL COMPETITION
AND EFFECTIVE DEMAND
Mots-clés Schumpéterienne Concurrence et Keynésienne internationale modélisation diffusion dynamique de la technologie dynamiques
Key words International competition Technology diffusion Schumpeterian and
Keynesian Dynamics Dynamic Modelling
INTRODUCTION
This paper analyses number of issues which were characteristic of the
growth processes of advanced economies in the 1980s and 1990s there was
an important diffusion process of new general purpose technology GPT
ii as broad characterisation one can say that the US took on the role as an
innovator in introducing this GPT with Europe broadly following iii
there was speed up of catching-up of sub-group of developing economies
South East Asian later China and India in an era of increasing globalisation
iv both factors and iii should in principle have given boost to global
economic growth however for quite some time it looks as if actual growth is
in more precarious state in advanced economies than in the earlier post-war
period
The paper develops dynamic model of integrated economies through trade
and EDI which attempts to address the above developments The model has
Schumpeterian and Keynesian features in that it depicts the income distribu
tional shifts which might accompany the diffusion processes of new technolo-
The paper was prepared as part of the project MACROTEC Integration of
Macroeconomic and S&T Policies for Growth Employment and Technology financed by
the Fifth Framework programm
REVUE CONOMIE INDUSTRIELLE no 105 ler trimestre 2004 23 gies emergence of Schumpeterian innovational rents and discusses effective
demand problems which can arise both as result of income distributional
changes on the one hand and catching-up processes on the other
The paper starts with the stylised description of competitive situation bet
ween two sets of advanced economies say the US and the EU and in which
one region the US experiences the diffusion process of the new GPT earlier
than the other region the EU The introduction of new technology shifts the
macro-distribution of income towards profits and the reliance of the growth
process towards the investment rather than consumption component of effec
tive demand Characteristics in the workings of the labour and product markets
affect the extent of these macro-distributional shifts The shifts are transitory
in that the Schumpeterian rent component gets eroded over time through
wage claims and price-cost adjustment processes) but in the transitory period
they have two effects one the accumulation rate and hence the production
potential gets boosted and in addition productivity growth can be further
endogenously stimulated two the greater dependency of effective
demand upon spending out of profits might increase the possibility of lea
kage which is modelled in the form of investment into liquid non-interest-
bearing assets Hence the transitory dynamic can significantly affect the
balance between potential and actual growth through its impact upon the level
of effective demand
The important addition in this paper compared to an earlier paper
Landesmann and Stehrer 2002 is that it deals with the accumulation and
transitory dynamic in an open economy setting allowing for the interaction
between two large sets of economies In this paper we shall focus on the rela
tionship between two sets of advanced economies the EU and the US) while
the same model can then also be used to study the interaction between the
group of advanced economies and significant group of catching-up econo
mies see point iii above An application of the model to this situation which
can also contribute substantially to effective demand problems in advanced
economies is discussed Landesmann and Stehrer 2004)
II THE MODEL
As mentioned above we model in this paper the interaction between two sets
of economies These are integrated through trade and foreign direct investment
flows as well as through interdependent price and exchange rate dynamics
Transitory paths describe the impact of changing cost competitiveness and
profitability positions upon net trade balances and net foreign direct invest
ment flows Uneven rates of technology diffusion and ensuing price-cost dyna
mics affect the relative attractiveness of different locations for direct invest
ments and the competitiveness of trading partners both in final
demand as well as in the international sourcing of intermediate inputs and
capital equipment The dynamics of capacity growth is driven by investment
flows determined by relative profitability) while the dynamics of output
24 REVUE ECONOMIE INDUSTRIELLE no 105 ler trimestre 2004 growth is driven by demand growth determined by the expansion of demand
components which are sensitive to relative price movements This leads to
potential output gaps i.e differences between potential and actual output)
Net trade balances foreign direct investment flows and investments into
liquid non-interest bearing assets amount to the international transmission of
leakages and injections in the two sets of economies They impact upon the
differences between potential and actual growth paths The interesting
point that we analyse in discussing the interaction between the two large eco
nomies is that the speed of technology diffusion and its impact upon macro-
distribution and growth is significantly affected by the degree of international
interdependence
The model described in the following is an extension of the model develo
ped in Landesmann and Stehrer 2002 to two-country case It treats the
issues in an aggregate framework but most analytical results can also be obtai
ned in multi-sectoral setting see Stehrer 2002)
2.1 Technology is denoted by pair of input coefficients ac and at where ac
denotes the input coefficient of intermediate goods and at the input coefficient
for labour Superscript denotes the respective country The labour input coef
ficient af is assumed to be strictly positive thus we assume that some labour
is always used in production Labour productivity is then l/af We shall take
account of changes in labour productivity but assume that the technological
input coefficient ac remains fixed
On the other hand we shall allow for substitution in the sourcing of the
input requirements across countries i.e inputs can be purchased in the domes
tic or the foreign country This then implies sourcing matrix in two
country case to be given by
with representing the sourcing and the destination country and Z;L are ac
We shall discuss the determination of these coefficients below
Labour input coefficients change according to the exploitation of an exoge-
nously evolving technological potential The evolution of the potential is
modeled as logistic curve i.e
pot 8alpot Sq f.pot pot
where ai denotes the technological potential and gai not ls
parameter which determines the speed by which an economy moves along the
logistic The labour input coefficients then evolve according to
REVUE CONOMIE INDUSTRIELLE no 105 trimestre 2004 25 o-0
a- 1- o-a/c 2.1
where is the starting value of the labour input coefficient This specifica
tion implies that labour input coefficients reach the exogenously given level
a/ although the time path is determined by the logistic Further the growth
rate of the logistics is partly endogenized by Kaldor-Verdoom effect kc
and will become function of the growth rate of output gq
2.2 Wages costs and prices
Nominal variables are expressed in national currency units At times we may
convert them into common currency Let us denote the exchange rate bet
ween countries and by xn E.g expresses price in country in cur
rency of country Similarly is price in country expressed in currency
of country We set ycc
The nominal wage rate in currency of country is denoted by Jr* and
unit labour costs are given by vyK af b)
Total unit costs are then at Por prices we assu
me country specific constant mark-up if on costs thus we have -x
This formulation implies that wages are paid at the beginning of
the period i.e antefactum
Price adjustment is modeled as price to cost plus normal mark-up adjust
ment In national currency units we assume the adjustment process given by
=-<5;[(1+ 2.2
with being the adjustment parameter With and positive
technology shock ac or at falling rents emerge in addition to profits 2)
The equilibrium of the price system can easily be determined for the case
that coefficient acr wc at and thus the unit labour costs ve and the mark-up
ratio Tr are exogenously given and constant
2.3 Profits and rents
The per unit equilibrium profit is defined as mark-up on costs In natio
nal currency this is re Trcc In the case that prices are not at the equilibrium
This rather mechanic specification represents the Schumpeterian insight that technologi
cal innovations induce transitory changes in the market structures which accompany the
introduction and diffusion of new technologies The chosen specification focusses on the
distribution implications of the macro-dynamics of technical change and does not derive
the individual firms pricing behaviour
26 REVUE CONOMIE INDUSTRIELLE no 105 ler trimestre 2004 level there arise per unit-rents which are again in national currency defined
as se Tt cc In the following we assume that part of the rents are dis
tributed to the workers denoted by as discussed below We define me as the
addition of profits re and the part of rents se that is not distributed to workers
sc and refer to it as retained earnings
me sc 2.3
2.4 Labour market dynamics
The out-of-equilibrium dynamics of the wage rate is modeled as follows
se
wc irwc 2.4
af
where uc denotes the unemployment rate uc he hc with he and le referring
respectively to labour supply and labour demand We assume that
and The first term means that part of transitory rents are distributed to
workers i.e compensating them for the increases in productivity and the
second term imposes negative effect of unemployment on the growth of the
nominal wage rate
Labour supply he is modeled as
he =0 1--he)+8 2.5
where denotes an supply-to-demand adjustment parameter and is an exo-
genously given growth rate of labour supply We assume that
/v >0 if le-he >0
<0
This formulation allows for an asymmetric adjustment of the actual partici
pation rate to positive or negative excess demand for labour in general one
would expect faster adjustment to positive excess demand and relatively
slow adjustment to negative excess demand)
2.5 Demand components and total demand
Next we turn to the determination of output Total supply/production is
denoted by qc Demand consists of three different components Demand for
intermediate goods consumption goods and investment goods We
now discuss these in detail
REVUE CONOMIE INDUSTRIELLE no 105 ler trimestre 2004 27 2.5.7 Demand for intermediate products
Demand for goods used in production is As mentioned
above intermediate inputs can be purchased at home or abroad As we are
interested to look at the demand on country we shall specify sourcing struc
tures from the point of view of those countries which may demand those inputs
from country these are the countries 12 For given sourcing coefficients
acr being the country demanding inputs from country out of group of
potential suppliers 12 the nominal share of total outlays on intermediate
goods demanded from is given by acr ZjL pV asr as for given sour
cing coefficients this is analogous to Leontief-technology
How are the sourcing coefficients determined We shall allow the sourcing
coefficients to be dependent on prices Using CES specification we model
the sourcing of intermediate inputs which country purchases from country
as
-1
2.6
As this formulation satisfies that ar asr är The coeffi
cients acr are the coefficients of the global sourcing matrix defi
ned above The parameter can be considered home-bias effect in the
case where or regionalist bias in cases where there are preferential
trading arrangements between countries and Total expenditures in
nominal terms by country on intermediate inputs is given by =é pV asr qr
Multiplying with the nominal expenditure share and dividing by the pre
vailing price in the source country pe gives demand for intermediate inputs
from country in country
acr
pe ser =é asr 5=1
which simplifies to acr qr qr Summing up over all countries 12 gives
the total demand for intermediate inputs in country i.e =é q
For dr the formulation collapses to Cobb-Douglas specification i.e constant nomi
nal shares) Or implies inelastic demand Or implies specific Leontief sour
cing technology) in this particular formulation this implies at equal supply prices also
equal shares in the purchasing from different sources finally means elastic
demand and with oo the goods are considered perfect substitutes
In the simulations we set the parameter in such way that at equal prices the share of
expenditure is given by pr
28 REVUE CONOMIE INDUSTRIELLE no 105 trimestre 2004 2.5.2 Wage income
Workers earn nominal wage rate wc and thus total nominal wage income in
country is atq as atqc is labour demand In classical fashion we
assume that workers spend all their income on consumption Consumers have
to decide in which country to purchase the goods Analogous to the specifica
tion above see equation 2.6) one arrives at the nominal share fr spent on
goods of country in country out of labour income The parameters in the
CES specification for trade in consumption goods are denoted by ar for the
elasticity of substitution and denotes again preference parameter for trade
in consumption goods between countries and Demand for consumption
goods produced in country and purchased out of income in country is then
expressed in the currency of country yY pc Thus demand for
consumption goods produced is the sum of domestic demand and
exports of consumption goods
(v-x-c Mq
f2 (v lc 22 q2
dii ï2
=[f à2 d22 q2
The matrix allocates spending from labour income in each country as
demand for consumption goods for the supplying country We denote the ele
ments of this matrix by df
2.5.3 Income out of profits
second component of demand is demand for investment goods financed
out of profits and the retained part of transitory rents which is not distri
buted to workers The volume of profits and retained rents arising in
country is given by rrrqc To provide for leakage effects we shall allow
for share of these earnings to be inveted in non-interest bearing financial
asset either in the domestic country or foreign country We denote these
shares by with To calculate the demand for investment goods
arising from these earnings we have to specify first in which country these
earnings are invested and second in which country the goods are purchased
To adress the first question we again use CES specification with the inverse
of the retained per unit earnings instead of prices Parameters are denoted by
and respectively specific country invests in country depending
upon its relative per unit profitability i.e per unit retained earnings) the
The analysis can be generalized to interest bearing assets Since the focus of this paper is
not on long-run transversality conditions with respect to financial asset accumulation and
decumulation but rather on the effect of leakages for transitory dynamics we do not
explore further the relationship between real and financial asset In the
simulations below we set these shares equal to the investment shares v
REVUE CONOMIE INDUSTRIELLE no 105 ler trimestre 2004 29 share vsr is denoted by vrs The nominal sum which is invested in nominal
country is then given by multiplying the shares with the volumes of retained
earnings nfqs and summing up over all countries we get EIL (l
Once we have specified where investments out of retained ear
nings are taking place we have to specify in second step in which country
the demand for investment goods is taking place We assume that this is deter
mined by relative prices For foreign direct investment we assume that the
investor takes over the technology i.e as specified by the labour input coeffi
cients and the inputs per unit of output requirements prevailing in the host
country we shall later on discuss the possibility of technology transfer
through FDI As regards sourcing of inputs two possibilities arise
First case In the first case the investor applies the same sourcing structure
as that prevailing in the host country The nominal sum invested from the
retained earnings recived in in country is allocated as is indicated
by the parameters above thus in this case we have Ccr where deno
te nominal shares of expenditures The sourcing coefficients are then given by
cr acr The demand pattern is given by pW pW
vr Demand in country for additional investment generated out of retained
earnings is then given by
=é/? (1-Et Xm -é
j2 éâ2 ic ë q2 q1
idjn af2 iqA
dj21 dj22 q2
We denote the elements of this matrix by de
Second case In this case the investor applies the sourcing structure in the sour
ce country i.e foreign investor might continue to rely on the suppliers he is
used to This would lead to sourcing structure of investments in the FDI recei
ving country which will reflect the sourcing structure of both foreign investors
and domestic producers with weights defined by their relative shares in capaci
ties We shall not explore this case any further here in any detail
Total demand is the sum of the three components intermediate inputs addi
tional investment demand out of retained earnings and consumption demand
Here only countries with are included Countries in which are not attracting
any additional outside investments and we set We have specified the simulations
of the model reported below in such way that negative profitability does not arise and
hence any negative net are excluded
30 REVUE CONOMIE INDUSTRIELLE no 105 ler trimestre 2004 Output dynamics Capacity growth versus demand growth 2.6
2.6.1 Capacity growth
For the dynamics of output we assume that supply adjusts to demand As in
classical input-output models for any level of final demand the necessary out
put can be produced Final demand is given by the vectors ri and i1 It can
be shown that given these two demand vectors total supply satisfying demand
will be given by
alz
û21 û22
where the term in the first bracket on the rhs is the Leontief inverse
Demand components and/c are themselves dependent on the output levels of
both countries One can show easily that unique solution for this system
exists
Investment raises capacities and thus enables the economies to grow As
mentioned above the sum of nominal investment in country in its own cur
rency is given by =é vrs (l This nominal sum is alloca
ted to purchase physical inputs and labour For momentarily given sourcing
and labour input coefficients the efficient allocation is analogous to Leontief
production function The capacity growth rate can be derived by calcula
ting the technologically required additions to the quantities of physical inputs
and labour and dividing these by the existing stocks of inputs and labour res
pectively It can be shown that this capacity growth rate also equals
=é ai-Z Kmy)
2.7 cap
vr qr
i.e the growth rate can be expressed as the nominal sum of investment in
country relative to the nominal stock of intermediate inputs plus labour
costs The capacity growth rate depends on the volume of retained earnings in
both countries the allocation of investment spending across countries and the
leakages which we shall discuss below
2.6.2 Demand and output growth
Let us now return to the determination of actual output paths In section 2.5
we have determined the demand components derived from incomes out of
wages and out of retained earnings Further we have derived capacity growth
rates in both countries in section 2.6.1 Demand for physical inputs and labour
demand will also be rising at this rate The dynamic equation for the evolution
of output can then be written as
REVUE CONOMIE INDUSTRIELLE no 105 ler trimestre 2004 31