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This paper develops a theory of total factor productivity differences in a framework of technology diffusion. I show how in countries with tighter borrowing constraints, frontier technologies diffuse more slowly, and old outdated technologies continue to be used. I analyse how countries with different borrowing constraints specialise across new and old technologies through two forms of intra-industry trade. First, I consider international factor mobility which is interpreted as a form of (vertically differentiated) intermediate goods trade. Second, I consider trade in (vertically differentiated) final goods. Under both forms of trade, poor countries with tighter borrowing constraints exploit their comparative advantage through specialising in older technologies. However, under international factor mobility, poor countries can adopt new technologies faster by gaining access to inputs which complement the use of newer technologies. The patterns of specialisation across technologies are dramatically different under each form of trade. Despite this, both forms of trade are consistent with total factor productivity divergence between countries with different borrowing constraints.

Borrowing Constraints and Technology Diffusion: Implications of Intra-Industry Trade