The made-in effect and leapfrogging: a model of leadership change for products with country-of-origin bias

Change in industrial leadership is often explained in terms of technological and costs advantages. In this paper we argue that, in presence of country-of-origin bias, demand conditions significantly influence the chances of leadership change. A model that aims at capturing the endogenous dynamics of demand building and leapfrogging is proposed. We show that acquiring a superior production technology is not sufficient for a latecomer country to become leader, especially in sectors with high monopoly power. In this case, latecomer countries remain specialized into low-value undifferentiated goods, even after overtaking the technology of the leading country.