Balancing short-run costs and long-run gains: the welfare implications investing in new technologies in developing countries

Purpose This paper aims to analyze the role of learning and the diffusion of new ideas and technologies as major drivers of growth, especially in developing countries, by incorporating the costs and specific requirements (vintage specific) of technology adoption. Design/methodology/approach The study presents an AK model with embodied capital technology, where new ideas or technologies are embodied in capital goods. To capture the human and physical requirements of adoption, the model employs a Nelson-Phelps catch-up equation. Findings The model reveals complex dynamics, including the potential for catch-up and leapfrogging within the AK structure and the possibility of negative growth and non-monotonic transitions toward a balanced growth path due to the adoption cost. The optimal pace of technology adoption generates a trade-off between short-run costs and long-run benefits. Practical implications Policymakers in developing countries have a range of policy options to foster growth, including reducing adoption costs, promoting new technologies or accelerating the diffusion and learning of new technologies. The model highlights the need to balance the trade-off between technological complexity (and its short-run costs) and long-run gains when choosing the optimal policy mix. Originality/value This work is original in integrating adoption costs and vintage-specific technology requirements into an AK growth model with a Nelson-Phelps catch-up mechanism. The results are particularly relevant for policymakers in developing countries, highlighting that the benefits from technology adoption may only materialize after the economy has gained a deeper understanding of the new technology.