Globalization of production and the technology transfer paradox

This paper develops a growth model aimed at understanding the effects of globalization of production on rate of innovation, distribution of labor income between the North and South and welfare of workers in both regions. We adopt a dynamic general equilibrium product cycle model, assuming that the North specializes in innovation and the South specializes in imitation. Globalization of production resulting from trade liberalization and imitation of the North?s technology by the South increases the rate of innovation. When the South?s participation in the product cycle is not too deep, further deepening of globalization of production lowers the wage of Southern labor relative to that of its counterpart in the North. This poses a technology transfer paradox similar to that discovered by Jones and Ruffin (forthcoming, JIE): an increase in the uncompensated technology transfer from the North to the South makes the North better off. However, a point will be reached where further deepening of globalization leads to increases in relative wage of the South. For this reason, the North would eventually lose from uncompensated technology transfer as globalization deepens.