Developing Countries: A Dynamic Non-Linear Model

This paper attempts to theoretically understand the process of catching-up or falling behind particularly within the context of developing countries. The main aim of the paper consists in investigating the impact of domestic innovation, via its interaction with the learning capability, on the technology gap of an economy. More specifically, we seek to shed some light on why the tendency for poor countries to fall further behind, despite efforts to improve their learning capabilities, appears pervasive. Our analysis is based on a simple model of technology gap elaborated by Verspagen (1991). We find that domestic innovation, a critical component for the development of an absorptive capacity, is a significant determinant of whether an economy catches-up or falls further behind.