Knowledge Diffusion, Supplier's Technological Effort and Technology Transfer via Vertical Relationships

This paper studies the effect of knowledge diffusion on the incentives for developed countries(DC)' firms to undertake costly technology transfer to their developing countries(LDC)' suppliers whose cost of production varies inversely with their technological effort. When the incumbent supplier's cost of improving efficiency is high, upstream (or, respectively, downstream) diffusion of knowledge to potential input (final output) producers encourages (discourages) technology transfer as it increases upstream (downstream) competition. However, and in sharp contrast to existing literature, when technological effort is less costly, upstream (downstream) knowledge diffusion discourages (encourages) technology transfer by reducing (increasing) the incumbent supplier's technological effort.