INTERNATIONAL DIFFUSION AND APPROPRIABILITY OF TECHNOLOGICAL EXPERTISE by Elias Dinopoulos (University of Florida) and Constantinos Syropoulos (Florida International University) May 1998 ABSTRACT To the extent that technological expertise generates economic rents, it may be in the interest of those who lack it to appropriate it from those who possess it. Similarly, owners of intellectual property may find it desirable to control the degree to which knowledge is diffused. We study these issues in the context of a simple duopoly model in which a technology leader and a technology follower engage in one of two types of imperfectly discriminating contests: one in which they expend resources to influence the probability with which knowhow spills over to the technology follower; and another in which the two firms negotiate a technology licensing agreement but contest the magnitude of the lump-sum transfer associated with the license fee. Our analysis reveals that ex post both firms benefit from a licensing agreement only if the technological distance between them is sufficiently small. However, depending on their bargaining power and the degree of security of intellectual property, the follower may ex ante find the regime with technology licensing to be disadvantageous. JEL Classification: C78, D30, D70, F23 Key words: Contests, technology diffusion, appropriation, licensing, imperfect competition, trade ________________________ Elias Dinopoulos, Department of Economics, P. O. Box 117140, University of Florida, Gainesville, FL 32611-7140. Phone (352) 392-8150; Fax: (352) 392-7860; E-mail: dinopoe@dale.cba.ufl.edu Constantinos Syropoulos (corresponding author), Department of Economics, Florida International University, University Park, DM-321, Miami, FL 33199. Phone: (305) 348-2592; Fax: (305) 348- 1524; E-mail: syropoul@fiu.edu