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Authors:

• Wolfgang Keller
  University of Colorado-Boulder

• Stephen R. Yeaple
  The Pennsylvania State University

This paper offers a new perspective on technology diffusion, a topic crucial to many fields in economics. We develop a theory of technology transfer by multinationals to their foreign affiliates in which gravity for technology arises because direct communication substitutes for the transfer of technology embodied in traded intermediates. The greater an industry's knowledge intensity, the harder communication becomes. The model predicts that in knowledge-intensive industries trade costs dampen affiliate intermediate imports the least while affiliate sales are deterred the most. Further, the average knowledge content of affiliate imports is increasing in trade costs. We con.rm these predictions using a rich firm-level dataset for U.S. multinationals, and show that the cost of shipping technology is substantial, especially in knowledge-intensive industries.