Division of Labor and the Transmission of Growth

This paper studies how an independent upstream capital good sector in a technology based industry can act as a mechanism for the transmission of growth across countries. Technologies, once developed, can be ‘transferred’ to other countries at low incremental cost. If there are upstream firms which specialize in providing technology and engineering services to downstream buyer firms, then the greater the number of such specialists, the greater the net surplus that buyers get. Since the number of specialists is determined by the size of the downstream sector, the growth of the downstream sector in leading countries (first world) has beneficial effects for the growth of the downstream sector in follower countries (less developed countries). We empirically test this proposition using a comprehensive data set of investments in chemical plants in the developing countries during the 1980s. We find that one additional specialized supplier in a given process technology would have increased the expected investment in LDCs by $100 million to $200 million, with the increases greater in more mature technologies, and for larger LDCs.