Technology diffusion, absorptive capacity, and income convergence for Asian developing countries: a dynamic spatial panel approach

In this paper, we analyze convergence in relative income using a technology diffusion model allowing for spatial interdependence among 11 Asian countries from 1970 to 2014. We compute impulse responses (absolute or conditional convergence) to stochastic productivity shock through sensitivity analysis using a two-country model. We then conduct spatial panel model estimation, decomposing marginal effects into direct (own country) and indirect (spillover) effects for a multicountry empirical model. Technology stock is measured according to the total factor productivity of the Asian country relative to that of the leader country, the USA. Through sensitivity analysis, we find that the results support both the absolute and conditional convergence hypotheses in the technology diffusion model. The dynamic spatial Durbin panel regression results with the Schumpeterian technological diffusion model and the extended neoclassical growth model support the conditional convergence hypothesis among Asian countries since the total effect on the lagged relative income is significant and negative. The total effects of human capital investment rate, total factor productivity, and trade on relative income growth are positive and significant, and most technology shock is transferred by absorption capacity in combination with trade in Asian countries.