Endowment, technology choice, and industrial upgrading

This paper sets up a dynamic infinite-industry model to discuss the impact of factor endowments on technology choice and industrial upgrading. The model shows that at any time, the technologies in any industries should be adapted to the factor endowments structure. It further shows that as the economy develops, the industrial structure is unimodal with a leading industry, and with capital accumulation, each industry experiences technology upgrading from labor intensive to capital intensive and the leading industry shifts to more capital intensive as well. The model’s implications are consistent with the stylized facts of manufacturing data from the United States and other countries. By incorporating various frictions and market failures, the model can discuss various policy issues in economic development.