Technology gap

Technology Gap Theory is a model developed by M.V. Posner in 1961, which describes an advantage enjoyed by the country that introduces new goods in a market.^[1] The country will enjoy a comparative advantage as well as a temporary state of monopoly until other countries have achieved the ability to imitate the new good. Unlike the past theories which assume the market to be fixed and given, such as the Heckscher-Ohlin theory, the technology gap model addresses the technological changes. It suggests a state of economy influenced by science, politics, markets, culture and most importantly, uncertainty, which threatens the mainstream neoclassical economists as they explain economic outcomes mainly based on the natural endowment scarcity. The theory is backed up by the ideas of Joseph Schumpeter. As a result, the technology gap theory is often rejected by neoclassical economists.^[2]

The theory assumes that the two countries have similar factor endowments, demand conditions, and factor price ratios before trade. The only difference is the technique. The technology gap exists between the time the new products are imported from external markets and the substitutes are created by domestic producers. Meanwhile, according to Ponser, the gap is constituted by three lags as follows:^[3]

1. Foreign Reaction Lag: The time required for the innovative firms to produce the products with new technology, and these products will later be exported to external countries.
2. Domestic Reaction Lag: The time taken by all domestic firms to continue producing relatively newer versions of products as to retain their shares in the global market, before they realize the threat of the new products imported. Within the period, there is also an imitation lag, which suggests the time the local entrepreneurs need to learn to adopt the new technology to make and sell substitutes.
3. Demand Lag: The time that the domestic consumers need to acquire or adapt their tastes for the new products.

The total lag is calculated by subtracting the demand lag from the imitation lag. If the demand lag is longer than the imitation lag, then the domestic market will start to demand the foreign goods. The demand of imported goods overriding the domestic products will in turn leads to the erosion of the local market and deficit in the trade balance.^[3]