Innovative activity is highly concentrated in a handful of advanced countries. These same countries are also the major exporters of capital goods to the rest of the world. We develop a model of trade in capital goods to assess its role spreading the benefits of technological advances. Applying the model to data on production and bilateral trade in capital equipment, we estimate the barriers to trade in equipment. These estimates imply substantial differences in equipment prices across countries. We attribute about 25 percent of cross-country productivity differences to variation in the relative price of equipment, about half of which we ascribe to barriers to trade in equipment.

Trade in Capital Goods

https://www.nber.org/system/files/working_papers/w8070/w8070.pdf

Firms in the same industry exhibit systematic differences in the organization of production and the structure of employment. Entrepreneurial ability is the specific scarce input that limits the size of a firm. This input must be allocated to two activities, coordinating production and monitoring workers. Able entrepreneurs can convert calendar time into larger supplies of coordinating effort that enable them to assemble large firms. Greater ability implies a higher shadow price of time which increases the implicit costs of monitoring. A dispersion of entrepreneurial abilities generates an equilibrium size distribution of firms. Differences in monitoring costs affect the choice of worker productivities, the design of products, and the organization of production. The monitoring cost hypothesis advanced in this paper goes a long way in explaining the equilibrium of an industry containing heterogeneous firms that differ in size and behavior.

Heterogeneous firms and the organization of production

When countries import production machinery, they must choose between new and used equipment. This article looks at that choice in the presence of labor-saving technical progress and complementarity between technologies and skills within the firm. It develops a theoretical model of the market for used machines. It then analyzes data on United States (U.S.) exports of metalworking machine tools by country of destination, classifying machines according to their vintage and their technological characteristics. The data show that the share of used equipment imported is higher if the importing country has a lower level of development, as measured by income per capita. Econometric estimation of the determinants of this share shows that it also is higher the greater is the technological change embodied in the machine or the greater is the change in the skills required to run the machine efficiently. These results indicate that technological factors and skill constraints may be as important as factor prices in determining the choice of technique in developing countries. The policy recommendation emerging from this work avoid constraints on imports of used equipment is similar to that in the existing literature. But the reasoning is different. Instead of emphasizing inappropriate capital-labor ratios for low-wage countries, the results indicate that investment in advanced technologies is effective only if importing countries have the skills to use them.

/pdf/vintage-technologies-and-skill-constraints-evidence-from-u-s-55fywsxgc2.pdf

Vintage Technologies and Skill Constraints: Evidence from U.S. Exports of New and Used Machines

Publisher Summary The theory of international trade is one of the oldest subfields of economics. This chapter provides an overview of the present state of positive trade theory, concentrating on developments, at the same time it draws attention to the continuity in the development of the subject. It discusses the classical paradigm as a set of assumptions under which trade is limited to final commodities and markets are undistorted and characterized by constant returns to scale and perfect competition. Nowadays theories are motivated by certain key features of real-world trade: the vast exchange of raw materials and commodities that require further processing before being consumed, the large volume of intra-industry trade, and the importance of the size of markets. These extensions in analysis have been generally made without throwing away building blocks found in the earlier literature. Extensions of the simple models of production within the classical paradigm have broken out of the traditional two-by-two mold to analyze the importance of joint production, complementarity among factors, and general properties in higher dimensions. Earlier work on simpler trade models has proved of value in all these extensions.

M.A.M. Smith

Papers

International trade in second-hand machines