Foreign Technology Adoption as a Flying Propeller

We construct a dynamic general equilibrium model of foreign direct investment (FDI) and foreign technology adoption, incorporating adoption barriers, international technology spillover, and relative price advantages. A higher FDI conversion efficacy, a lower adoption barrier, or a stronger international technology spillover, together with a lower relative price of FDI, can propel an economy to exhibit a flying geese paradigm escaping from a middle-income trap and catching up with the world frontier. We calibrate the model to eight representative Asian economies, including Asian Tigers and less-developed countries. Growth accounting exercises show that total factor productivity, FDI conversion efficacy, and foreign technology spillover drive Asian Tigers’ growth miracle, whereas a reduced adoption barrier and a favorable relative price of FDI are more crucial for the growth of less-developed Asian economies. The counterfactual analysis confirms that technology-embodied FDI serves as a flying propeller, explaining almost two-thirds of their economic growth.