Not only are some countries richer than others, but the differences also seem to be stubbornly persistent – with many countries stagnating and, over time, becoming even poorer relative to more-advanced economies. Significant differences and possibilities for stagnation also occur between cities and regions within countries, even when they have similar levels of education and capital. Moreover, since comparatively educated and trained labor is systematically cheaper in some of the poorer locations, entrepreneurs or highly-skilled migrants stand to benefit from large arbitrage opportunities by moving to a location, hiring the cheaper labor and competing locally or internationally.
The primary research question is: Why doesn’t migration, joint ventures and foreign direct investment rapidly diffuse technology by investing in or moving to cheaper locations? An answer to this question, both theoretically and empirically, is central to development economics, urban economics, regional studies, and growth. To address these questions, we propose a new theoretical model with workers tied to a location and managers who embody the technology and can easily move to use cheap labor. Even if there are no direct costs of adopting new technologies or migrating between locations, coordination frictions (i.e., the difficulty of hiring well-matched resources/employees and coordinating their production) are enough to explain why technology can be slow to diffuse in economies with production complementarities.