Capital Goods Imports and Economic Growth - Trade Policy or Structural Capability?

Capital Goods Imports and Economic Growth

  Capital goods imports are an important source of technological transfer from developed countries (DCs) to less developed countries (LDCs). However, in practice, poor countries do not import more capital goods from the DCs than their rich counterparts. Based on the idea of “absorptive capability”, this paper will attempt to explain this observation by the fact that the presence of a relatively well-developed local capital goods sector helps a more efficient use of imported capital goods. An open developing economy may face a dilemma in the early stages of industrialization because local capital goods should be used with foreign capital goods as complementary inputs while at the same time their further development can be limited by the international competition. In this case, a developing economy can be caught in a poverty trap even under an open trade regime. Simple protectionist measures cannot serve as an appropriate policy alternative because, among other issues, they reduce the amount of technology spillovers from industrialized countries. The cross-country empirical evidence shows that the quantity of machinery imports from the OECD countries are more closely associated with the degree of development of local capital goods industries than with trade policies. That is, economies with a more advanced capital goods sector tend to import relatively more capital goods from industrialized economies than others.