One of the fundamental assumptions of financial side is that every financial system faces unemployment problem cyclically due to financial depression. Precisely to say, a depression is a very severe downturn in financial activity that lasts for several years which creates a severe decrease in real output and abnormal increase in unemployment rate. However, Job opportunities are decreased not only by economic recession, but also by the new technologies. It means to the adoption of new technology has a great negative contact on a financial system.
It is because product innovation has a higher degree of creating new jobs than destroying the existing sectors. However, if LDCs accelerates process innovation, the financial system will face a small increase in productivity on the one hand and a sharp decrease in employment rate on the other that would be extremely harmful to the financial system. Consequently, for the developed economies, product innovation, as well as process innovation is a must to commence for accelerating the productivity and efficiency in the production process to go for the high mass consumption level.
Nevertheless, under the above policy, if a situation arises where the effects of product innovation is lower than that of Process Innovation, then the developed countries would gain a comparative edge over the LDCs to make financial progress in a shorter period of time. However, such situation is hardly found in the real world environment. Conversely, the effects of product innovation are naturally higher than that of Process Innovation, which creates a comparative advantage for the LDCs to follow the policy of implementing only product-innovation-oriented-technologies rather than to follow the policy of implementing both product and process innovation oriented technologies.
The world's developed economies are moving substantially away from labor-intensive or capital-intensive industries towards knowledge. Information intensive industries. However, it does not mean that this fact will be applicable to all economies. Moreover, as information is costly to produce but cheap to reproduce, there is a chance to imitate new products by the unauthorized firms.
Nonetheless, Information is rarely traded on competitive markets as it is a highly differentiated Product. As a result, information goods' producers have some market power to manipulate its products' prices, but the lack of entry restrictions tends to force profits to zero over time. If such situation happens, then it will be okay. However, if entry restriction takes place due to high initial capital inflows in IT investments, then the existing firms can be able to determine market price for capturing the whole consumer surplus. It is a hindrance to. Maximize social welfare. Therefore, what the government should do is to eradicate all sorts of barriers to entry for the potential entrants of information goods.
