Technology Adoption Of Heterogeneous Firms In Open Economics

Firm heterogeneity plays an important role in explain TFP differences and empirical facts of international trade, this paper analyzes the impact of firm heterogeneity on technology diffusion, technology upgrading in developing countries and the product quality differences between developing and developed countries.Based on Melitz (2003) model, this paper constructs a general equilibrium model with heterogeneous firms on technology diffusion. The study shows, firms with higher productivity will adopt new technology earlier, and their market share will expand, however, firms with lowest productivity and without adopting new technology will be squeezed out of the market, thus technologies gradually diffuse. Contrast with previous literatures, in our paper, the technology diffusion process is generated from firm’s productivity heterogeneity and gradual declining adoption cost, and it is associated with resource reallocation. This paper argues that the barriers to reallocate resources is an important factor which blocks technology diffusion in developing countries, and competitive effect from international trade will improve resources allocation, and then speed up technology diffusion.With the advancement of globalization, more and more multinational enterprises enter developing countries, which makes developing countries access interests of labor division in international trade. However, it also caused some problems. For instance, it makes developing countries stagnate in the production of low-end product, and technology upgrading becomes more difficult for enterprises in host country. We build a simple model of heterogeneous firms to explain this problem in Chapter5. If there is not enough high skilled labor in developing countries, processing trade of multinational enterprises will inhibit the technological upgrading of local enterprises, and total factor productivity will not improve in a long period. These developing countries need to enhance the level of human capital in order to get out of this situation. It is worth noting that the theoretical model gives a new explanation for why some developing countries caught in the middle-income trap.A large number of empirical literature have analyzed the impact of international trade on product quality upgrading. This article also introduce the choice of product quality to Melitz (2003) model in Chapter6. After firms enter the market, they can adopt new technology to improve product quality. Firms with higer quality products can gain more profits. Due to the differences in productivity levels between firms, the optimal investment of technology adoption is also different. With the decrease of trade cost, high productivity firms who export will increase investment in technology in order to improve product quality; By contrast, low productivity firms will reduce their investment in technology adoption. If efficiency of technology adoption is different in different country, improvement of trade openness affects the developed countries and the developing countries asymmetrically. The South has a disadvantage in products quality upgrading. Competitive effects of trade further lock the developing countries to export low-quality products, the developed countries continue to export high quality products.