Division of Labor, Market for Technology and Investment

Abstract

Division of labor has benefits in addition to the direct productivity increases from specialization: In this paper we study how the development of specialized upstream technology suppliers improves access and lowers investment costs for latecomer downstream firms. Using a simple model, we test this idea using comprehensive data on investments in chemical plants in less developed countries (LDCs) during the 1980s. We find that investments in chemical plants in the LDCs are greater, the greater is the number of technology suppliers that operate in the first world. A major contribution of this paper is that we identify an important and understudied mechanism through which technology is made available, with beneficial effects for investment.