The Effect of Protectionism on Technology Sharing and Industrial Development

It is well-known that firms that compete directly with one another often also cooperate by sharing technical know-how (Saxenian, 1994). In the early stages of industrial development incentives to do so can be particularly strong (Braguinsky and Rose, 2009). Since technological diffusion hastens industrial development and sharing technical know-how hastens technological diffusion, an important question is how incentives to share technical know-how might be affected by infant industry protection. We present a dynamic model of industrial development that links industry protection from foreign competition to the rate of technology diffusion within a given infant industry. Our model explains how infant industry protection might substantially alter the industrial life-cycle. We show that innovating firms in an unprotected industry will switch from sharing to concealing technical know-how only after the industry becomes large relative to the world market. Under protection from foreign competition, however, concealment begins much earlier in the industrial life-cycle. It follows that protectionist policies may result in industries that never fully realize their potential and remain unable to compete in the world market without continued protection from foreign competition.