Technology gap

Posner: a great deal of international trade among industrialized countries is based

on innovation, i.e., the introduction and export of new products or production
processes or both. Countries that are relatively sophisticated in technology, such as
US, Japan, Germany, tend to be innovative over time and have a competitive edge
because of this ability. Therefore, a great deal of international trade can be
explained by export of new products and processes from the innovators to other
countries.
Innovation creates a temporary technological gap which generates temporary
monopoly profits. Imitation by rivals erodes this competitive advantage.
Posners Theory: a microeconomic point of view-Suppose an innovative firm
has a temporary monopoly based on patents and copyrights. It is able to export its
new product or production process overseas without foreign competition. According
to the theory of imperfect competition, a monopoly produces at the point where
marginal revenue equals marginal cost and enjoys an economic profit, denoted by
area p*ABG.

Posners Theory: a microeconomic point of view-export market of the

innovative firm shrinks and its profit dwindles. Over time, the followers are able to
produce at a lower cost than that of the innovator, therefore export the product
back to the country of origin. And the comparative advantage shifts from the
innovator to the followers. Eventually,the innovator earns normal profit.

The technology gap theory describes an advantage enjoyed by the country that introduces new goods in a
market.[1] As a consequence of research activity and entrepreneurship, new goods are produced and the innovating
country enjoys a monopoly until the other countries learn to produce these goods: in the meantime they have to
import them.[1] Thus, international trade is created for the time necessary to imitate the new goods (imitation lag).[1]
This lag has several components, that Posner (1961) classifies (from the point of view of the importing country) in
the following categories:[1]
1. foreign reaction lag. This is the time between the successful utilization of the innovation by entrepreneurs
in the innovating country and the new goods becoming regarded, by some firms in the importing country,
as a likely competitor for their products.
2. domestic reaction lag, which is the time required for all firms in the importing country to become aware of
the competition from the new good.
3. learning period, which is the time required for the importing country's firms to learn to produce the new
good, and actually produce and begin selling it on the domestic market.
According to Posner, to get the total net lag, one should subtract from the imitation lag a demand lag, that is, the
time elapsing between the introduction of the new good in the innovating country and the appearance of a demand
for it in other countries (some time elapses before the other countries' consumers come to know of the new good
and acquire a taste for it).[1] Imports of the new good will therefore take place only in the period of time resulting
from the difference between the imitation lag and the demand lag. [1]