Working Paper: NBER ID: w3201
Authors: Gene M. Grossman; Elhanan Helpman
Abstract: We develop a two-country model of endogenous innovation and imitation in order to study the interactions between these two processes. Firms in the North race to bring out the next generation of a set of technology-intensive products. Each product potentially can be improved a countably infinite number of times, but quality improvements require the investment of resources and entail uncertain prospects of success. In the South, entrepreneurs invest resources in order to learn the production processes that have been developed in the North. All R&D investment decisions are made by forward looking, profit maximizing entrepreneurs. The steady-state equilibrium is characterized by constant aggregate rates of innovation and imitation. We study how these rates respond to changes in the sizes of the two regions and to policies in each region to promote learning.
Keywords: Innovation; Imitation; International Trade; Product Cycles
JEL Codes: O31; O33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Northern firms' innovation (O31) | competitive dynamics with Southern firms (L19) |
| Northern firms' innovation (O31) | product quality (L15) |
| product quality (L15) | competitive dynamics with Southern firms (L19) |
| sizes of North and South regions (R12) | rates of innovation (O39) |
| government policies that promote learning (I28) | rates of innovation (O39) |