The Labor Market Consequences of Appropriate Technology

Developing countries rely on technology created by developed countries. This paper demonstrates that such reliance increases wage inequality but leads to greater production in developing countries. I study a Brazilian innovation program that taxed the leasing of international technology to subsidize national innovation. By exploiting heterogeneous exposure, I show that the program led firms to replace technology licensed from developed countries with in-house innovations, which led to a decline in both employment and the share of high-skilled workers. I explain these findings using a model of directed technological change and cross-country technology transactions. Firms in a developing country can either innovate or lease technology from a developed country, and these two technologies differ endogenously regarding productivity and skill bias due to factor supply disparities in the two countries. I show that the difference in skill bias and productivity can be identified using closed-form solutions by the effect of the innovation program on firms' expenditure share with low-skilled workers and employment. By calibrating the model to reproduce these effects, I find that increasing the share of firms that patent in Brazil by 1 p.p. decreases the skilled wage premium by 0.02% and production by 0.2%.