Should policymakers in developing countries prioritize foreign technology adoption over domestic innovation? How might this depend on development stages? Using historical technology transfer data from South Korea, we find greater productivity gaps with foreign firms correlate with larger productivity growth after adoption, despite lower fees. Furthermore, non-adopters increased patent citations to foreign sellers, suggesting knowledge spillovers. Motivated by these, we build a two-country growth model with innovation and adoption. As the gaps narrow, productivity gains and spillovers from adoption diminish and foreign sellers strategically raise fees due to intensified competition, making adoption subsidies less effective. Korea’s shift from adoption to innovation subsidies substantially contributed to growth and welfare. We also explore the optimal policy and its interaction with import tariffs.
STEG Working Paper Series
• Research Theme 1: Firms, Frictions and Spillovers, and Industrial Policy,
Research Theme 5: Political Economy and Public Investment
From Adoption to Innovation: State-Dependent Technology Policy in Developing Countries
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