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Technology (eq. 3), grows with output, services and, through diffusion, with foreign technology, also given the contribution of human capital. Technology accumulation in each country depends both on domestic factors and on the diffusion of technology between countries. This, in turn, depends on the intensity of technology accumulation in other countries, on the impact of “distance” between countries, as well as on the ability of receiving countries to use imported technology. Human capital in the receiving country (HKR) measures the capacity of absorption of technology by the recipient country while human capital in the sending country HK measures the capacity of the latter to produce technology. We also assume that services operate as an attractor of technology in that the more developed is the service sector in the recipient country the larger is the demand for technology. 7

C. Explaining Technology Accumulation and Diffusion: The Model with Many Countries

The role of technology diffusion and distance require some further explanation. Technology in country j grows as a negative function of geographical distance (dist) from country i from which technology is acquired. In addition we assume that the impact of distance decreases over time reflecting lower cost of transferring technology and information across space as technological progress increases productivity. However, as Peri (2004) notes, time could have a negative impact to the extent that the value of innovation in a patent decreases over time with obsolescence. As a technology variable we use patents citations. Flows of patents citations (Pat) measure the change in the accumulation of the stock of technology. Bilateral flows of patents citations (Patij) capture the diffusion of technology between two countries. Citations to country j occur when a patent whose inventor is resident in another country, say i, mentions another patent -whose inventor is obviously original of country i- for the contribution it gives to the mentioning invention. From now on we will refer only to patents for simplicity.

We now consider the case of n countries so as to clarify the characteristics of the process of technology accumulation and diffusion. The technology flow relations among countries give rise to a matrix whose values change over time. In a n country case the matrix would look like the following where patent flows take place between different pairs of countries.

1

2

3

11 21 31

Pat Pat Pat Pat

n1 .1

Pat

12 22 32

Pat Pat Pat Pat

n2 .2

Pat

13 23 33

Pat Pat Pat Pat

n3 .3

Pat

Total

…. ..

Total

Pat

1

Pat

2

Pat

3

n

n

Pat

1n

Pat

2n

Pat

3n

Origin\ Destination

1 2 3

nn Pat

Patn

P a t n

Pat

7

For a discussion of the microfoundations of the estimated model see Maggi (2005).

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