Starting with David Ricardo, economists have examined how national differences in technological capabilities give rise to specialization and trade. Since then a large strand of the economic literature has been concerned with the intricacies of the relationship between trade and technology. Three types of interaction can be envisaged:

• In learning-by-doing, trade increases the size of markets and the scale of specialization with positive spillovers on the domestic production of knowledge and accumulation of experience. Specialization may switch from sectors with low technological spillovers (e.g. primary goods) to sectors with important learning-by-doing effects (e.g. low-tech manufacturing goods).

• In learning-by-importing, foreign technology gets used or imitated. Trade transfers foreign technologies to the domestic economy or lets domestic firms improve their own technologies or products through reverse engineering and imitation.

• In learning-by-exporting, exporting firms learn by observing their competitors on international markets and aim to reach the same efficiency as their competitors by adopting their technologies.

Trade as a channel of technology diffusion

Together with foreign direct investment (FDI) and the diaspora, trade counts as one of the most important mechanisms for transferring technologies and diffusing innovation. In fact, trade and innovation are mutually reinforcing. Innovation gives birth to technological advantage which, together with differences in factor endowments, is the source of comparative advantage which in turn drives trade. Trade and investment affect innovation through technology transfer, competition effects, economies of scale and spillovers. Intellectual property protection matters too in stimulating technology diffusion.