On the welfare effect of international technology transfer in a two-country Ricardian model

The purpose of this paper is to sketch out what are the consequences of free technology transfer, licensing and foreign direct investment (F.D.I) on the North-South welfare in a two-good, two-country Ricardian model. On the demand side and following the recent reappearance of the homotheticity restriction on consumers preferences, we use a Cobb-Douglas utility function. We show how that the developed country, which has an absolute advantage based on technology in both goods, gains by selling, giving, or investing into using the advanced technology in the developing country’s export sector. We find that the developed country unambiguously gains regardless of the mode of technology transfer. Even if it receives no income from abroad, it must benefit from the transfer due to an improvement in its terms of trade. In the other hand, we show that F.D.I and licensing may decrease developing country’s welfare because of the transfer of income to the developed country.