Innovators and imitators in a world economy

R&D, an important determinant of productivity, is highly concentrated in rich economies because of the slow diffusion of knowledge to developing countries given the cumulative nature of technological progress. This study presents a dynamic general equilibrium model of international trade, innovation, and technology diffusion with a continuum of countries. A point of departure from traditional trade models is that comparative advantage based on innovative and imitative R&D productivities determines the identity of innovators and imitators. Through this mechanism, the division of the world economy into two groups, North and South, endogenously emerges as an equilibrium outcome. The model allows us to explore interesting issues related to economic policy and development, including the following questions. Does strengthening patent policy induce imitating economies to innovate? Does subsidizing innovation or imitation promote the industrialization of developing economies. If so, how does the inequality of the world economy change? We demonstrate that the answers to these important questions crucially depend on knowledge useful to imitative R&D.