Vertical technology transfer via international outsourcing

To analyze the effect of vertical technology transfer on industrial develop ment in lesser developed countries (LDCs), we develop a model in which the technology transferred to an LDC supplier by a developed country (DC) impor ter can diffuse to other LDC firms. Surprisingly, even if such diffusion in the LDC market leads to entry into the DC market, it can benefit both the initial DC importer and its initial LDC supplier by reducing the double mar ginalization problem. This effect does not depend upon whether firms compet e in prices or quantities and exists even when the number of entrants into each market is endogenously determined. (C) 2001 Elsevier Science B.V. All rights reserved.