Why Integration Compounds A Threshold Theory of Technology Transfer and Global Value Chains

Abstract

The returns to integration into global value chains split by level of development: integration raises productivity and growth in emerging and faster-growing economies, but not in slower-growing developing ones. The split is established, but no formal model accounts for its consequences; this paper supplies one. A government and a private importer bargain over how much technology to import and who bears its risk, while national capability accumulates alongside the firm-level technology stock. Because the two parties accumulate different things, the importer under-invests, and the resulting wedge has two independent components that always point the same way. Below a capability threshold imported technology is neither retained nor learned from, so nothing carries forward; above it both channels operate and integration compounds. The paper characterises a threshold's consequences rather than deriving one. Its central result is a reachable frontier in chain ambition: it contracts as the cost of public funds rises and widens with the government's patience, both proved in a limiting case, generating a trap in which every reachable chain is unviable and every viable one unreachable. The model predicts that integration becomes self-reinforcing only above the threshold, which a panel of 39 economies illustrates without testing.