Technological Innovation, Trade and Development

This chapter tests empirically to what extent technological innovation influences international trade and studies its effect on different groups of countries according to their level of economic development. Different measures used in the literature to proxy for technological capabilities are reviewed and two of them are selected. The estimation results show that technological innovation has a considerably high explanatory power on trade compared with other traditional determinants. Countries tend to trade more when they have similar technological capabilities and the development of technological innovation has lowered the effect of geographical distance on trade. According to the obtained results, investing in technological innovation leads to the improvement and maintenance of the level of competitiveness, therefore a good economic policy in developing countries is to invest in technological innovation.