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This paper explores how developmental and regulatory impediments to resource reallocation limit the ability of developing countries to adopt new technologies. An efficient economy innovates quickly; but when the economy is unable to redeploy resources away from inefficient uses, technological adoption becomes sluggish and growth is reduced. The authors build a model of heterogeneous firms and idiosyncratic shocks, where aggregate long-run growth occurs through the adoption of new technologies, which in turn requires firm destruction and rebirth. After calibrating the model to leading and developing economies, the authors analyze its dynamics in order to clarify the mechanism based on firm renewal. The analysis uses the steady-state characteristics of the model to provide an explanation for long-run output gaps between the United States and a large sample of developing countries. For the median less-developed country in the sample, the model accounts for more than 50 percent of the income gap with respect to the United States, with 60 percent of the simulated gap being explained by developmental and regulatory barriers taken individually, and 40 percent by their interaction. Thus, the benefits from market reforms are largely diminished if developmental and regulatory distortions to firm dynamics are not jointly addressed.

Bankruptcy --- Constant returns to scale --- E-Business --- Economic Theory & Research --- Emerging Markets --- Equilibrium --- GDP --- Human capital --- Income --- Income levels --- Industry --- International trade --- Macroeconomics --- Macroeconomics and Economic Growth --- Monopoly --- Political Economy --- Private Sector Development --- Product markets --- Production function --- Production goods --- Production inputs --- Productivity --- Productivity growth --- Random walk --- Regression analysis --- Technology Industry --- Telecommunications --- Total factor productivity