(Revised April 23, 2024)

Developing countries rely on technology created by developed countries. I show that such reliance increases wage inequality but leads to greater production in developing countries. I study a Brazilian innovation program that taxed the transfer of international technology, such as patent licenses or technical consulting, to subsidize national innovation. The program induced firms to replace technology transferred from developed countries with in-house innovations, which led to a decline in both employment and the share of high-skilled workers. Using a model of directed technological change and technology transfer, I find that closing Brazil to international technology transfers would decrease the skilled wage premium by 1% and GDP by 28%.