Trade and Development
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Abstract
This chapter tests empirically to what extent technological innovation influences international trade and studies its effect on different groups of countries according to their level of economic development. Different measures used in the literature to proxy for technological capabilities are reviewed and two of them are selected. The estimation results show that technological innovation has a considerably high explanatory power on trade compared with other traditional determinants. Countries tend to trade more when they have similar technological capabilities and the development of technological innovation has lowered the effect of geographical distance on trade. According to the obtained results, investing in technological innovation leads to the improvement and maintenance of the level of competitiveness, therefore a good economic policy in developing countries is to invest in technological innovation. IGI PUBLISHING This paper appears in the publication, Information and Communication Technologies for Economic and Regional Developments edited by H. Rahman © 2007, IGI Global 701 E. Chocolate Avenue, Suite 200, Hershey PA 17033-1240, USA Tel: 717/533-8845; Fax 717/533-8661; URL-http://www.igi-pub.com ITB13961 80 Márquez-Ramos, MartÃnez-Zarzoso, & Suárez-Burguet Copyright © 2007, Idea Group Inc. Copying or distributing in print or electronic forms without written permission of Idea Group Inc. is prohibited. Introduction In the last decades there have been important changes in the international environment, with an increasing number of countries that are closely linked to one another through international trade and foreign direct investment. Globalization, new technologies, and information flows play an important role in this worldwide interdependence. In this framework, trade theory highlights the importance of technological change in explaining the competitiveness of a country. The main purpose of this chapter is to test empirically to what extent technological innovation influences international trade and to study its effect on different groups of countries according to their level of economic development. In the next section, different measures used in the literature to proxy technological capabilities are presented. In a knowledge-based economy with high and increasing dependence on technology, information and human capital, the development of relevant indicators to measure the level of technological innovation across countries is a matter of great importance. For this purpose, three components of technological innovation are considered: creation of technology, diffusion of recent innovations and diffusion of old innovations (as measures of information technology), and development of human skills (as a measure of human capital). The third section presents the estimated model and the empirical results. Empirical results show that technological innovation has a considerably high explanatory power on trade in comparison to other traditional determinants. Moreover, the view that countries tend to trade more when they have similar technological capabilities is supported. Results also show that the development of technological innovation has lowered the effect of geographical distance on trade, since long distances are less important nowadays than in the past. Therefore, investing in technological innovation could help to improve and maintain the level of competitiveness and this will increase the participation of the poorest countries in the world economy. The fourth section includes a sensibility analysis where groups of countries with different levels of income are considered in order to test for the pooling assumption. Since the magnitude and sign of the explanatory variables depend on certain characteristics of the trading partners, the estimation results support the existence of important differences concerning the goodness of fit, and the significance and magnitude of the variable coefficients. The fifth section includes three future perspectives for this research, related to the variables included in the model (distance as proxy of transport costs) and the improvement of the estimation methodology (division of countries in different groups and panel estimation). Finally, some conclusions of this research are presented in the last section.