Technology Development through Knowledge Assimilation and Innovation: A European Perspective

The current paper studies an endogenous growth model driven by the technological development level of a country, which conditions both its factor productivity and the financial investment decisions of agents. Heterogeneity in the level of technological development among countries may not only lead to temporal divergences in income and productivity levels but also to divergent growth paths and poverty traps for identical available technologies. The authors illustrate the structural instability resulting from differences in the technological development level of countries and the subsequent financial constraints arising from such differences. Consequently, a strong national system of innovation should prove vital to ameliorate the negative real effects that follow from a severe financial shock. The obvious and imminent implications regarding the expected evolution of the European Monetary Union are derived both formally and numerically. Technology Development through Knowledge Assimilation and Innovation: A European Perspective