Technology gap

Technology Gap Theory is a model developed by M.V. Posner in 1961, which describes an advantage enjoyed by the country that introduces new goods in a market.[1] The country will enjoy a comparative advantage as well as a temporary state of monopoly until other countries have achieved the ability to imitate the new good. Unlike the past theories which assume the market to be fixed and given, such as the Heckscher-Ohlin theory, the technology gap model addresses the technological changes. It suggests a state of economy influenced by science, politics, markets, culture and most importantly, uncertainty, which threatens the mainstream neoclassical economists as they explain economic outcomes mainly based on the natural endowment scarcity. The theory is backed up by the ideas of Joseph Schumpeter. As a result, the technology gap theory is often rejected by neoclassical economists.[2]

The theory assumes that the two countries have similar factor endowments, demand conditions, and factor price ratios before trade. The only difference is the technique. The technology gap exists between the time the new products are imported from external markets and the substitutes are created by domestic producers. Meanwhile, according to Ponser, the gap is constituted by three lags as follows:[3]

  1. Foreign Reaction Lag: The time required for the innovative firms to produce the products with new technology, and these products will later be exported to external countries.
  2. Domestic Reaction Lag: The time taken by all domestic firms to continue producing relatively newer versions of products as to retain their shares in the global market, before they realize the threat of the new products imported. Within the period, there is also an imitation lag, which suggests the time the local entrepreneurs need to learn to adopt the new technology to make and sell substitutes.
  3. Demand Lag: The time that the domestic consumers need to acquire or adapt their tastes for the new products.

The total lag is calculated by subtracting the demand lag from the imitation lag. If the demand lag is longer than the imitation lag, then the domestic market will start to demand the foreign goods. The demand of imported goods overriding the domestic products will in turn leads to the erosion of the local market and deficit in the trade balance.[3]

History
Fig.1 The International Product Life Cycle by Raymond Vermon

The development of an explicit technology gap model started with Ponser. The key for the theory is the rate of diffusion of technology. Moving on to 1966, Vernon further extended the technology gap model into the product life-cycle theory.[2] The degree of maturity of the technology became the new key of the dynamic economic trade. Vernon's theory resonances with the technology gap theory. As Fig1. shows, at the new-product phase, the product is only produced and consumed in the innovating countries, usually the developed countries. But, as the product matures, the imitating countries, usually the developing countries, intervenes the market by underselling the products. The production of the product gradually gets standardized and the innovating countries can no longer monopolize the market.[4]

In 1981, Pasinetti proposed a Ricardian comparative advantage model that emphasizes on the rate of innovation. Later, Dosi and his colleagues affirmed technology gap as the heart of absolute advantage in 1990. Moreover, Dosi et al. complicated the definition of diffusion, which makes a smooth diffusion process does not exist anymore.[5] The new definition now writes as: the "process of learning, modification of the existing organization of production and, often, even a modification of products."[6]

Between Countries

Technological changes is cumulative, path-dependent, and non-specific for each country. Thus, it is hardly sharable between nations. Nowadays, it can determine the competence of a nation to a great extent, and influence demand conditions and technological policies. As a result, the technology gap theory strongly emphasizes on the role of government in prompting innovations.[2]

United States, as one of most technologically advanced nations in the world, exports a variety of new technology to conquer the global market. Most of the time, other countries acquire the same technology sooner or later. With lower labor costs, U.S. no longer hold the comparative advantage in making the same products. However, U.S. producers can keep on introducing new technology to the markets abroad and new technology gap will be formed during the process.[4]

As long as the new technology is diffused to developing countries, the globalization will have a positive impact on them, otherwise, the domestic market will only be harmed.[6] African countries, for example, Kenya, are currently suffering from the technology gap not only globally but also domestically.[7] Organizations, such as the United Nations, are now working hard to bind such gaps within nations.[8]

Between Companies

Unlike between countries, technological changes between firms are specific. It is can be measured by the ability of the firm to produce and innovate.[3] Companies, such as pwc, offer surveys and solutions to help alleviate the gap between business and technology,[9] which will also lead to enhanced communication and creativity of the whole business, and making the enterprise more competitive in the market.

The 5G is an example demonstrating impact of technology gap on and between businesses. In accordance with the theory, the vice president and global innovation officer at Cisco said that "There is not any one country, one company or one continent that’s going to own 5G...I just don’t want the focus to be all about 5G and who gets to the finish line, the sprint first, because there’s a much longer race after that.”[10]

Limitations
  • The theory does not account for the size of technological gaps in a precise manner.[4]
  • The theory fails to illustrate why technology gap exists and how it diminishes over time.[4]

See also

References
  1. Gandolfo, Giancarlo (1998). International Trade Theory and Policy: With 12 Tables. Springer. p. 234. ISBN 3-540-64316-8.
  2. Arestis, Philip, 1941- Sawyer, Malcolm C. (1994). The Elgar companion to radical political economy. Elgar. pp. 415–419. ISBN 1-85278-460-1. OCLC 28547509.CS1 maint: multiple names: authors list (link)
  3. "Technological Gap Model of International Trade | Economics". Economics Discussion.
  4. SALVATORE, DOMINICK. (2019). INTERNATIONAL ECONOMICS. JOHN WILEY. ISBN 978-1-119-55492-9. OCLC 1114413401.
  5. Dosi, Giovanni, 1953- (1990). The economics of technical change and international trade. Pavitt, Keith., Soete, Luc. New York: New York University Press. ISBN 0-8147-1834-5. OCLC 22273291.CS1 maint: multiple names: authors list (link)
  6. "Technology Gap", The Growth of Chinese Electronics Firms, Palgrave Macmillan, p. 55, doi:10.1057/9781137391063.0006, ISBN 978-1-137-39106-3
  7. United Nations Conference on Trade and Development. (2003). Africa's technology gap : case studies on Kenya, Ghana, Tanzania and Uganda. United Nations. OCLC 605093710.
  8. United Nations. Department of Economic and Social Affairs, issuing body. (2018-10-15). World economic and social survey 2018 : frontier technologies for sustainable development. ISBN 978-92-1-109179-3. OCLC 1080898005.
  9. The New IT Platform: Bridging the Gap Between Business and IT. PricewaterhouseCoopers. 2015.
  10. Ellyatt, Holly (Nov 18, 2019). "5G doesn't belong to just one country, Cisco's vice president says". CNBC. Retrieved Nov 23, 2019.
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