Training, adverse selection and appropriate technology: Development and growth in a small open economy

Recent diffusion models cannot explain why the success of technology diffus ion depends so critically on developing countries' human capital levels. Th is paper examines three main issues, First, we endogenize both appropriate technologies and human capital formation. Second, we refine the human capit al accumulation process by introducing uncertainty about worker quality and training efficiency. Finally, we allow for international diffusion of tech nology as a function of the host country's endogenous ability to absorb tec hnological spillovers. The resulting model is one of uneven growth where tr ade amplifies worker quality problems in laggard countries. In contrast, te chnology spillovers are shown to generate additional incentives to accumula te human capital in the laggard country, since this allows for faster adopt ion and diffusion of foreign technology in the future. (C) 1999 Elsevier Sc ience B.V. All rights reserved.