Author(s): David Currie, Paul Levine, Joseph Pearlman and Michael Chui
Source: Oxford Economic Papers, Vol. 51, No. 1, Symposium on Trade, Technology, and Growth (
Jan., 1999), pp. 60-88
Published by: Oxford University Press
Stable URL: http://www.jstor.org/stable/3488592
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( Press 1999
OxfordUniversity OxfordEconomicPapers51 (1999), 60-88 60
1. Introduction
Two keyfeatures thatdetermine tradingpatterns and growthin theglobalecon-
omy are the speed withwhich thepoorer South absorbs knowl-
scientific/technical
edge and management/commercial skills
from the North, and the costin
relative
the South of imitatingcomparedto innovating.Knowledgetransfers can be
increasedor impededbyinternational institutional
arrangements and specificpoli-
cies thataffecteducationand trainingin the South.The incentiveto innovate
ratherthanimitatein the Southwilldependamongstotherthingson the inter-
nationalprotectionof intellectual propertyrightsand on government policies,
including to
subsidies, encourageinnovation in theNorthand South.
This paperexaminestheseissuesbydevelopingan endogenousgrowthNorth-
Southmodeldrivenbyknowledge spillovers.Thismodelis thenusedto analysethe
impact ofvarious R&D subsidies.
Our model buildson theworkofGrossmanand
Helpman(1991) (henceforth G&H), but extendsitin an importantdirection. G&H
develop North-South modelsin whichtheSouthimitates theNorth,but does not
innovate.Suchmodelsincorporate thetraditionalrelationshipbetweenNorthand
South;but theyare less appropriate fortheanalysisof relationships betweenthe
matureindustrial economies(OECD) and the rapidlygrowingeconomiesof the
PacificRim.Table 1 indicateshow SouthKoreaand Taiwan,twoleadingPacific
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D. CURRIE ET AL. 61
Table 1 Innovationperformance
R&D/GDP Growth
in R&Dt Patentsgrantedt
1993(%) Ranking 1989-93(%) Ranking 1992-93 Ranking
Korea 2.08 11 9.72 10 9.25 10
Taiwan 1.78 13 16.71 4 66.46 1
UK 2.11 10 - 1.86 29 7.86 12
US 2.77 4 - 1.05 28 20.53 6
growthin totalexpenditure
t Annualrealcompoundpercentage of R&D.
$ Averageannualnumberofpatentsgrantedto residents
per 100,000inhabitants.
Source:The WorldCompetitiveness
Report1995.
Rim economies,are now emerging as centresof R&D activity and new product
development. Comparing the shareof R&D in
expenditure GDP, theannualcom-
in
poundgrowth R&D expenditure, and patentsgranted to residents ofTaiwanand
SouthKoreawithtwoothertypicaladvancedOECD countries, theUSA and UK,
we can see thattheformer countriesarebecominga focusofinnovation in itsown
right.' To analyse the interaction between Northern innovators and Southern
imitators and innovators thusrequiresa modelthatallowsforthe possibility of
bothimitationand innovationin thelatterregion.Developinga modelwiththis
featureis thecentralcontribution of thispaper.
Variousothermodelsalong'new' growththeorylineshavebeen developedto
describeNorth-Southinteractions. Initially theseadoptedthetraditional focusof
theSouthas notbeingan innovator(G&H, Ch. 11; Segerstrom et al. 1990).This
has been followedby 'leapfrogging models'whichassumethatthe South,while
starting offas an imitator,may become an innovator instead(Chou and Shy,1991;
Barroand Sala-i-Martin, 1995; Breziset al., 1993).Segerstrom (1991), in a closed-
economymodel, shows that an equilibrium withbothimitationand innovation
involvingcollusionbetweenfirmscan exist.The prospectof collusionthenpro-
videsan incentive to engagein costlyimitation. In theNorth-South modelofG&H
it is theabsenceoffactorpriceequalizationand theabilityofSouthernfirms with
lowerwage coststo priceNorthernfirmsout of the marketsthatprovidethis
incentive, and we retainthisstructure.
Our model is the firsttwo-blocendogenousgrowthmodel to examineand
integrate threephasesof development: innovationin theNorthwithimitationin
the South;innovationin the Northwithboth imitationand innovationin the
South; and finallyinnovationin both blocs. The key factorsthat determine
whichphase occursas an equilibriumare first,the degreeto whichcopyingis
easierthan innovationfora givenstockof knowledgecapital;and second,the
relativestocksof knowledgecapitalper worker.The latterin turndependson
the rateof diffusion of one region'sinnovationsinto the knowledgecapitalof
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62 PHASES OF IMITATION AND INNOVATION
2. A North-South
modelwiththreephasesofdevelopment
Therearetworegions: NorthandSouth.Botheconomies consist
ofa monopolis-
tically production
competitive sector
and a sector
competitive conducting R&D.nN
varieties
wereinventedandarenowproduced intheNorth. nsareproduced inthe
Southandofthesensoriginated intheSouthfrom innovationandnswerecopied
fromtheNorth(wherethesubscripts i andc representinnovation andcopying
Thusthetotalnumber
respectively). ofvarieties
availableto consumersin both
regionsis n = nN+ ns= n + ni + n. Thedemand sideofthemodelis entirely
standard:consumershaveidentical world-wide
preferences andmaximize a utility
functionwhichislogarithmicina Dixit-Stiglitz
indexwithelasticity
ofsubstitution
S= 1/(1- a) > 1, wherea E (0,1) is thetasteparameter.2 Aggregatingover
and
regions writing world nominal as
consumptionE gives total
world demand
forvarietyj wherever
itis producedas3
2A lowervalueofa represents
a greater
tasteforvariety
byconsumers.
Appendix1,Section1.1,givesfull
details
oftheconsumers'
problem.
3 Thegeneral
notation
adopted denotes
throughout ofvariety
supply j byblocbby b = N,S ata price
x>b;
or iftheorigin
is irrelevant.
G&Hchoosethenormalization
E = 1.Weprefer
thenormalization
p1 pj theNorthern to
thatsets wage unity 1,Section
(seeAppendix 1.2).
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D. CURRIE ET AL. 63
b = N, S. The Northernfirm'sprofit-maximizing
price and profitssubjectto
demand by(1) arethengiven
given by
N= PN wN
Pi a
rj = Nr = (1 - a)pNxN (2)
i.e.,allvarieties
in theNorthhaveequalpricesandprofits.ForSoutherninnovating
firmspricingand profits are analogousto (2) and givenby
wS
7
= 7rc= (1 - a)psxc(4)
In thenarrow-gapcase theSouthernfirmchargesa limitpricejustsufficient
to
eliminatea potentialNorthernrival,i.e.
S S N
PC,] = w
P-
r,= S (wN- w5)xs= (5)
Now considerthe R&D sectors.The ratesof productionof new goods in the
Northand South,and thetransfer ofproduction
to theSouththroughcopyingare
givenby
nc+ N K
*N _LNKN
? a
L
a/3Ks
>(6)
where
ac ac c
LSKS
s s
C I a< a
LN,Ls,andLS;KN,andKs denotelabouremployed
inresearch
andcopying
sectors,and knowledge capitalperunitoflabourin Northand Southrespectively.
The assumption ac < a capturestheidea thatcopyingis easierthaninnovationfor
a givenstockofknowledge capital.Similarly > 1 allowsforinnovation in
activity
theSouthto be lessefficientthanin theNorth.Forthetimebeing,we treat as
ac
constantbutlaterin Section3 we shallassumethat is a function oftherelative
ac
size of thecopyingsector,nf/n.
The treatment of knowledgecapitalis centralboth in generalto endogenous
growth modelsofthisgenre,and in particular
in ourmodelwherewe allowforthe
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64 PHASES OF IMITATION AND INNOVATION
K -0 teKN(t- n
KN= 0 [N+
K
n +n+ N" 7) d7j
Ls S(T)
ns+ns s e- s(t-T)nN(r) dr
KS = 0 + ~-
+ni n SN"(7)*
so thattherearespillovers
fromone regionto another,
buttherateofassimilation
of one region'sinnovationsintotheknowledgecapitalof theother,capturedby
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D. CURRIE ET AL. 65
KN= 0 n
L+ L+s (8)
Our formulation of knowledgecapital largelyremovespopulationeffectson
growth.It is also straightforwardto showthereare also no size effects on levels
ofrealvariablessuchas thetermsoftradewhenK-* oc. Withlittlelossofgeneral-
itywe therefore assumeequal populations,i.e., LN = LN = 1 in the subsequent
sectionsof the paper.This simplification is unimportant wheninnovationonly
takesplace,as a transformation ofvariablesfromnbto nb/Lb (b - S,N) willreadily
demonstrate. Whenimitation the
occurs, population ratioLs/LN playsa rolein the
results;thisis unsurprising,
becausethegreaterthisratio,thegreateris thelike-
lihoodof imitation bytheSouth.
Now considerthefinancial sectors.Letthestockmarket valueofthetypicalR&D
firmin theproduction sectorsproducinginnovative goodsin theNorthand South
and imitatedgoodsin theSouthbe denotedas vN, and respectively. A new
vi, vc
blueprint in the North costswNa/KN and value maximization requires to be
this
equated with vN. The same argument applies to innovationand imitationin the
Southgiving
N w a
KN
SwS a3
I=KS
S wSacf
vc= KS (9)
We assumeperfect betweenproductionand R&D sectorsin each
capitalmobility
region,but financialautarky
betweenregions.In theNorththetypicalfirmmust
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66 PHASES OF IMITATION AND INNOVATION
takeintoaccountthat,duringtheperiodoftimedt,itwillbe imitatedbytheSouth
h /nNdt. This givestheno-arbitrage
and forcedout of businesswithprobability
condition
*N -.s
S = rN (10)
VN nN
VN
whererbdenotestheinterestrateinbloc b. In theSouthwe musttakeintoaccount
between
arbitrage threeassets: bonds,and theequitiesof firmsproducing
riskless
innovativeand imitated
goods. The no-arbitrageconditionis then
SS .S
+ s=r = + (11)
-7
The modelis closedwitha labourmarketequilibrium
conditionforeach region
=
Kj( Afi)+ nxN LN
+ ns+ X +ns s (12)
aK3-n
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D. CURRIE ET AL. 67
3. Thesteady
state
Fromthedemandand pricingequations,(1), (2), (3), and (5) we can writedown
relativedemandrelationships
thefollowing
S - -E
xS
x= i (13)
1- _+= Ng (15)
g
follows.Differentiating
Ks w.r.t.timeusingthedefinition
in (7) and putting
I = 0
of k as
givesthesteady-state
k= 1 CNg
(16)
In thesteadystatewe haverN= rs= p wherep is therateoftimepreference of
consumers(seeAppendix1). Thencombining theno-arbitrage
conditions (10) and
(11), theNPV rulesforR&D investment
(9), thepricingequations(2), (3), and (5)
with(13) and (14) gives
-
wf/v?Ksx? kw
7rN/vN= KNxN-
I- -(17) p+g
p+ g + c
7r/vS Ks(1 - w)LaxcSa k(1 - w)-a p+ g
- a)xNacO (1-
- KNW(1
rN/vN - p+=-(18)
g+ c
Thenequating(17) and (18) we arriveat a)a
,(1 - a) a, _ E (1- w)
E = (19)
- f(w)
-
ci a w
say.The function f(w) in (19) can be shownto havea maximumat w = a, and to
be decreasingforw > a which,we recall,is thenarrow-gapcase.Proposition1 tells
us thatthisis therelevant rangeofw forthephaseofimitation and innovation in
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68 PHASES OF IMITATION AND INNOVATION
the South.Since ac/a < 1 and f(1) = 0, the left-hand side of (19) lies between
f(a) and f(1). f(w) thereforecrossesthisvalue at one pointw E (a, 1). This
narrow-gap solution to (19) is independent nof and is decreasingin a,l/a.
Hencewe havetheproposition:
2 Forthephaseofimitation
Proposition in theSouth,thereexistsa
and innovation
equilibrium
unique steady-state relative w
wage = wSl/wN the narrow-
satisfying
gap conditionw > a. This equilibriumsteadystate is independentof r, but
decreasingin ac/a
The intuitionbehindthesecondpartof thispropositionis as follows.Equation
(19) is a consequenceoftheno-arbitrage conditionbetweenimitation and innova-
tion in the South.This requiresequalitybetweenthe steady-state rateof return
fromR&D investment in thesetwo activities; i.e., r/vs = rv = p g from
(11). Both the relativewage costs and theproductionprofitsare independent of
knowledgecapital, and hence the assimilation parameter K. It follows that the
equilibriumrelativewage at whichtheno-arbitrage conditionis satisfiedis also
independent ofr. Bycontrast, iftherelativeR&D costofa blueprint forimitation
relativeto innovation, ac/a, increases thentheno-arbitrage conditionrequiresthe
relativeimitation-innovation profitsalso to rise.The limitpricingceilingforthe
imitatedgoods and mark-uppricingfor innovativegoods means that this is
achievedby a decreasein the South-Northrelativewage w. As ac/a increases,
thenimitationdeclinesso releasinglabourfromproductionand R&D activities
by a sufficientamountto bringaboutthisdownwardmovement in w.
Equations(15), (16), (17), and (19) together withthesteadystatesoftheequa-
tionsin (12), i.e.
+g)Wt [g+(p+g)
0=(k)g +(P c' (20)
NI- (P + g + c),
= (1 - N
-- _ )[g+(p+g) w]
k~za( 1-kaa-
yieldsixequationsforthesteadystateofthesixendogenousvariablesk,(N, ~S, w,
g, and c. This definesa steady-state equilibriumgivenexogenously determined
parameters ac/a, r, 0, 0, p, and a.
A fullanalyticaltreatment of the equilibriumprovesimpossiblein our six-
equationsystem, so we resortto numericalresultsat variouspointsin thepaper.
The calibratedparameters arediscussedin Appendix4 and summarized in Table4
in thenextsection.Tables2 and 3 reportfulldetailsof thisequilibrium in which
Southernimitation and innovation existtogether.As ac increases,copyingbecomes
moredifficult,so thatSouthernresources shifttowardsinnovation, and thegrowth
rateg increases.Likewise,as the assimilationrate, ', increases,thereis a shift
towardSoutherninnovationuntil eventually, the copyingsectorvanishesfor
highenough<.
Figure1 illustratesthedomainof theequilibrium in (ac/a,i) spacewherethe
boundarybetweenimitation onlyand imitation/innovation arethosevaluesofac/a
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D. CURRIE ET AL. 69
Table 2 Simulationresultsofvarying
ac
ac 0.0540 0.5500 0.5750 0.6000 0.6250 0.6500 0.6680
n
Table 3 Simulationresultsof varying
K 0.0600 0.0700 0.0800 0.0900 0.1100 0.1300 0.1600
0.35
0.30
0.25
Innovationonly
0.20 intheSouth
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70 PHASES OF IMITATION AND INNOVATION
co'(l-o) cQa
aa
a'() <o
.....
O! 03=1
8
This obviouslyraisesthe questionas to whythesame argument
does not applyto innovation(see
Stokey,1995).
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D. CURRIE ET AL. 71
wageratio,o
Relative
o.83-
0.81
0.79
0.77
0.758 Imitation Innovation
0.73 / Phaseal) : Innovation
andr
0.69
0.67
0.65
0.005 0.030 0.055 0.080 0.105 0.130
Rateofassimilation,
K
4. Stability
and transitional
dynamics
We nowturnto thestability ofthethreeequilibria.
Assuming thatthetradebalance
is zero,we can writethefulldynamicmodelin termsofdynamicequationsing, k,
(N, (S, and w,withg and w as jumpvariables.Appendix1 givesfulldetailsofthe
transitionaldynamics.Takingdeviationsabouttheirequilibrium
valueswe obtaina
linearizedapproximation to the dynamicsby evaluatingthe Jacobianmatrix.9
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72 PHASES OF IMITATION AND INNOVATION
Relative ratio
consumption
0.85
0.80
0.75
Phase(III)
0.70 Innovation
Phase(I) Phase(II) iOnly
Imitation Imitation
Only
Innovation
0.60
0.55
0.005 0.030 0.055 0.080 0.105 0.130
Rateofassimilation,
Kt
ParameterValues: as forFigure3.
GlobalGrowth
Rate,g
0.04
0.03
0.03 i Phase
(III)
Innovation
0.02
Phase
(1) Phase
() Only
Imitation Imitation
Onl and i
0.02 - Innovation
0,.01
0.005 0.030 0.055 0.080 0.105 0.130
Rateofassimilation,
iK
ParameterValues: as forFigure3.
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D. CURRIE ET AL. 73
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74 PHASES OF IMITATION AND INNOVATION
Deviation
(%)
1.5i
1.0 Ak
0.5T
0.0
-0.5
-1.0
Time
Deviation(%)
1.0
0.0
-0.5
Time
Deviation(%)
40
30
20Ac
10
-10 Ag
-20
Time
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D. CURRIE ET AL. 75
Eq. (21b)
0N increases
0
Eq. (21a)
g1
icae
Fig.7. Effects
of subsidies in phase(III)
on growth
The combined
effectis to raisethesteady-state
globalgrowthrate.A similar
applies
argument to a subsidyqs to innovation
in the Southfinancedby a
tax
lump-sum on Southern residents.
we can establishthe increasein g by writingthe equilibrium
Analytically
conditionsas
k 1
la(
-
N) [g + g)(1 - ~O)] (21 b)
(p
a
0=a(1 +l
Equations (21a) and (21b) follow from (20) by putting1 - N and
1- E - i-
= S = 0 in phase (III). It is now easy to show that in (g, (N) space,
thefirst
oftheseequationsslopesdownand shifts to therightwithincreasing 0qN;a
littlemoreeffort
showsthatthesecondequationslopesup and also shiftsto the
rightwithincreasing
Os (see Fig.7).
We can summarizethisas follows:
4 In an equilibrium
Proposition withno Southernimitation(phase(III)), a subsidy
to eitherNorthern or Southerninnovation
raisesthesteady-state
growthrate.
Now considerthe oppositeextremeof low n, wherethereis no innovation
activityin theSouth(phase (I)). G&H considera specialcase of phase(I) where
thereare no international spilloversi.e., ,N = ,S = 0, (although,fromeq. 7, ,N
plays no role if the Southdoes not innovate).Our treatment of thisphase gen-
eralizesthatofG&H to thecaseKs =- > 0; in factourresultsdo notqualitatively
differ.
A subsidyto Northern innovation increases theshareofvarietiesproducedin the
North;a subsidyto Southerncopying, has theoppositeeffect by increasingthe
qcs,
rateoftransfer ofproductionto theSouth.Thereare threeeffects to consider:on
the Northerncost of a blueprint,on Northernoperatingprofits,and on the
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76 PHASES OF IMITATION AND INNOVATION
S= ag + (1 - )( pN +g) (22 a)
1-a
-
(1 -
N
o+)
[g
kI-a
+
a-(22b)
1-E
(,_ON)p +
(N (22 b)
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D. CURRIE ET AL. 77
so- 2.5
60
1.5
1
50
200.5 2
-i 0 i
0.-----
0 20 11 2 3 3( : 4 20 11 2
2 (%)
3 4 5
(b) SubsidizingSoutherninnovators
70 - 3.5
2.5
40
20 0
1 i I
0 2 4 8 10 0 2 4 6 8 10
(c)Subsidizing
Southern
imitators
20 0.5
40
00.5
0 2 4 6 8
(b)
~r"
10 0 2 4
0(9S
6 8 10
Fig.8. Effects
of subsidieson steady-state
productsshares, 'N, and the rates
of growthg and copyingc forphase (II). ON is the fractionofiS,
NorthernR&D
innovationcosts financedby a subsidy.4s, qOSsimilarlydefinedforSouthern
innovationand copyingrespectively
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78 PHASES OF IMITATION AND INNOVATION
6. Welfareanalysis
Welfareis definedforeachbloc byexpression
(A.1.1) in Appendix1, so thatfrom
(A.1.2) and the pricingbehaviourpN = wN/c, pS = ws/a and pS = wN we obtain
-
Ub(O)- e-pt logEb + log[nN(pN)'- + ni(w~wp)l + nc(apN) 1] dt
(24)
Note that(24) appliesto all phasesin theSouth:nS= 0 in phase(I), nS,c > 0 in
phase(II), and
n_ = c = 0 in phase(III). Sincephase(II) is moregeneralthanthe
10
Helpman(1993)studies
thisissuein a North-South
modelwithimitation onlyin theSouth.His
modelis somewhatsimplerthanours,andthatinG&H,inassuming costless
imitationandmarginal
costpricing
intheSouth.Ourwelfare belowclosely
analysis follows
Helpman.
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D. CURRIE ETAL. 79
Phase c ~S oN
1 log[ + (1 -
e--1 (pN)l + (pN)l i)(N)- dt (25)
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80 PHASES OF IMITATION AND INNOVATION
(b) SubsidizingSoutherninnovators
Deviation
(%)
10 0.10
S----- 0.05
-5
-5 Ac
-10 0.00
-15 -0.05
-20
-25 -0.10
(c) SubsidizingSouthernimitators
Deviation
(%)
15 0.06
10 -0.04
5 &c 0.02
0.00.
0 / -0.02
-5 - -0.04
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D. CURRIE ET AL. 81
UN" 0.56)
O(0.38,
(0.45,0.49)
*,
0 Us
(-0.15.-0.24)
s, 0, .
(0.09,-0.15)
log e-Pt
US(o) = p(E -n(0)
1) g
p(-1) + o 0 k (g
_ ii _ gN) aoSgS
k
S[ log[N + S- + (1 -N _ )C-
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82 PHASES OF IMITATION AND INNOVATION
Phase(I): narrow-gap
ON = 0.05 0.57 -0.53 -0.27 0.05 0.05 0.09 0.35
Phase(II)
Os = 0.05 0.67 0.02 -0.64 -0.13 0.35 0.56 0.38
S= 0.05 -0.24 -0.02 0.15 0.02 -0.12 -0.24 -0.15
ON = 0.05 0.23 -0.52 0.10 0.14 -0.24 -0.15 0.09
Phase(III)
= 0.05 0.34 -0.03 -0.46 -0.18 0.25 0.13 0.13
ON = 0.05 0.47 -0.48 -0.02 0.19 -0.37 0.18 0.08
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D. CURRIE ET AL. 83
whereas
positive, theoppositeis trueforthetradeeffect
in theSouth,'2
andthis
fora Southern
holdsanalogously subsidy.
7. Conclusions
We havepresented a modelofimitation andinnovation whichhasthefeature of
catchingup whichis mostclearly relevanttothePacific Rimeconomies. We have
shownthatequilibria including innovation and/orimitation dependon cross-
country knowledge assimilation effects
and the ease of imitation.
Wehaveanalysed theeffectsofvarious different types ofsubsidy andsomeclear
globalpolicyimplications emerge. whether
First, subsidies to R&D in boththe
NorthandtheSouth,financed bytheregion concerned, increase welfaredepends
ontheSouthern
crucially phaseofdevelopment. In phase(III),withinnovation in
bothregions, subsidies are unambiguously beneficial and increase welfare and
growth, Northand South.In phase(I) wheretheSouthonlycopies,thesame
resultis obtained.However, in phase(II) thesituation is morecomplicated.
Onlya subsidy to Southern innovation increases welfare in bothblocs.Subsidies
eitherto Northern innovation or to Southern copying increase thelatterand
discourage Southern innovation. Thisresults in a welfare dropforone or both
regions.
Thesecondresult is thatin phase(II) subsidies to Southern innovation areso
totheNorth
beneficial thatevenwhenthey arefinanced by thatregion the result is
Pareto-improving. GiventhattheSouthis in reality a mixture of countries in
different
phasesofdevelopment ourresults suggest thatsupport forR&D viewed
froma globalperspective callsforcarefully designed differentiated policieswhich
takeintoaccountdifferent North-South trading Given
relationships. theinter-
nationalspillovers,the coordination of these policiesmaydeliver significant effi-
ciencygains and this one
suggests important area for future research.
becauseourmodelisa fullemployment
Finally, one,ourwelfare analysisignores
transitionalunemployment effects from
arising thereplacement ofimitation with
innovation intheSouth,andthecontinuous transfer oflabourto newvarieties in
boththeNorthandtheSouth.Theunemployment aspectofNorth-South tradeis
addressed in Wood (1994)andRowthorn (1995),butthesestudiesignore long-
termgrowth effects.
Thedevelopment ofNorth-South modelstoincorporate both
endogenous and
growth unemployment, for on
building, example, Aghionand
Howitt(1994),is another direction forfuture research.
Acknowledgements
Thispaperis produced
as partoftheESRCGlobalEconomic
Institutions Grant
Initiative,
No.L120251005.Wearegratefultoparticipants
atGEIworkshops,
Jaume Ventura andother
12The
previous
footnote
canbe usedtoclarify
thealgebra.
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84 PHASES OF IMITATION AND INNOVATION
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D. CURRIE ET AL. 85
Appendix1
1. Transitional
Dynamics
In thisAppendix,we providethedetailsof thedynamicsof themodel.Withlittleloss of
we assumeLS = LN = 1.
generality,
Db [{_
di"j
It is well-known thatcurrent periodmaximization
of Db overthevarietiesgivennominal
expenditure Eb n=
o pjxjdj yields(A.1.2)
Eb
maxDb = (A.1.2)
op- dj)1/(1-E)
(S0
Eppe
x=
pj.E (A.1.3)
dJ
The budgetconstraintsfortheNorthand Southare givenby
AN = rNAN+ WN_ EN AN = nNvN
As = rSAS+ ws - Es As = ncS + nvY (A.1.4)
whereAbis thetotalwealth.Maximizing (A.1.1)subjectto (A.1.2)and (A.1.4)and imposing
theusual transversality
conditionsgives
Eb= rb
b- p; for b = N, S (A.1.5)
1.2 Transitional
dynamics
We choosethenormalizationwN= 1 and assumedbalancedtrade.Thenexpenditure
equals
outputin each bloc,i.e.,
EN = p nNxN =1 n xN
ESm
=po S
+s psnxt =inix a+s
nx (A.1.6)
of themodelas setout in (1)-(12) aboveleadsto'13
Algebraicmanipulation
13
Fulldetailsare availablefromtheauthors.
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86 PHASES OF IMITATION AND INNOVATION
0-ag
+a<ggi
S
0- (
63) k _SgS- - (A.1.7)
-ag+a+ +
a( (1-- w)a-E
(1 k
ac + ) w)a -_
=0
(0- ag+ dgi) (A.1.8)
(1 - a) - ag +a gis
d(O-g +a - ag
) (0 - agS)
dt
= -
ga gpS+ [
- - -
(g _gS (NgN) (A.1.9)
k= - kg= (g +
a)(1 - k) - g (A.1.10)
*N Nh
-N n nn NgN _ Ng (A.1.11)
=
is Sgi (A.1.12)
.g
c k+ a W-Ek (1 - a) 0 - ag+
aqsgis
k aaw N = aa JN
1(g- - NgN)
-N
(1 - - + -aS l-gN - -E
S wl-?S + al-E(1
-
_ iS)
(A.1.13)
(A.1.7) and linearidentities
(A.1.8) represent for(NgNand in termsof thefiveother
iSgs by (A.1.9)-(A.1.13).
variables:g, k,(N, and w. The dynamicsoftheseare represented
iS,
Appendix2
1. Dynamicsof model when phase (II) is not saddle-path
stable
Herewe givean outlineofthestablebehaviourofthesystem whenac is constant.The latter
corresponds to a constantarbitragevalueofw (call itW-)whentheSouthbothimitatesand
innovates.Firstly we observethatwithw constant, therearethreepre-determined variables,
and onejumpvariable, g. The systemhastwounstableeigenvalues attheequilibrium, so that
we wouldtherefore describeit as unstable.Note,however, thatthereis onlyone less stable
eigenvaluethanthenumberof predetermined variables;thusthereexistsa uniqueplanein
(k,(N, (S) space,suchthatiftheinitialvaluesofk,eN, iS lie on thatplaneand closeto the
equilibrium, thenthesystem willconverge to theequilibrium. We shalldefinetheregionto
one side of thisplane as the Southernimitationonlyregion,and the otherside as the
Southerninnovationonlyregion.
Supposethattheinitialvalueslie in theSouthernimitation onlyregion.The dynamics in
thisregionare different fromthoseon the plane becausethereis no arbitragerelation
betweencopyingand innovationin the Southso thatw in particular has dynamics(see
(A.1.13)). In addition,from(A.1.7) we see thatwithgS = 0, thedependenceofg and (NgN
on the othervariableschanges,so that(A.1.10)-(A.1.12)are different. Thereis an initial
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D. CURRIEETAL. 87
3
Appendix
1. Subsidies
In thisAppendix,
we present
thechanges
to themodelwhensubsidies
are granted
by
thegovernment to Northern Southern
innovation, innovation
and Southernimitation
respectively.
1.1 Subsidy
to Northern
innovation
LetONbe therateofsubsidy
government totheNorthern
ganted thus
innovators,
KNvN = ( - ON)wN
a
thefirst
replaces in (9). Thisleadsto changes
equation to eqs (17) and(20)
P+g - N)
kw-e(1 (17)
p+g+c f
p+g+c=
1-a
a[ - (1- )ag]a?NN)
(1O-
( N
1
(20')
K
Kss
v-= (1- 0)wS
ap
whichreplacesthefirstequationin (9). Thisleadsto changesto eqs (17), (19) and (20)
p+ g kw-
p+g+c -(1- qs) (17")
ac 1 a'C(1-a)
a -( s a 1--wc(19")
Sw l aa 10
0= +
k (-)(I) 1-w k g+(p+g) I) (20
1N ) 1- a' (1-
- -(P+-) I--
1.3 Subsidy to Southernimitation:narrow-gapcase
ifweassumegovernment
Finally, is subsidizing
Southern
imitation
attherateof0s, then
Ss= (1 - qS)wS
acf
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88 PHASES OF IMITATION AND INNOVATION
thefirst
replaces in (9). Thisleadsto change
equation in eqs (19) and(20)
-
ac a'(1 a)
(1- ) a w /1-W) (19"')
a =- w
k 1+)
S-
0 acO(1-N _-)[g+(p+g)
(14)] (20"')
- P+A- (18')
a-
acP p+ g + c
and theSouthernlabourmarketequilibriumin (20)
a a
(-N) +(P+g) (1 ) (20")
Otherwiseput(s = 0 andsuppress
(17) asbefore.
Subsidies
arethenincorporated
as forthe
narrow-gap case.
Phase(III) follows (s = 1 - sN- s = 0 andsuppressing
byputting (18).
Appendix4
1.1 Calibration
Our numericalsimulationsrequireparameter valuesfora, a, 3, p, and 0 forFig.1.
2
Figures and 3 in
require, addition,
ac and theremaining simulations also require
K.
Firstwe normalizea at unityand choosea discountratep = 0.05. A plausible
mid-rangeestimateforthe elasticity of substitutionis around2, so we choose
a = 0.5 (see Krugman,1991). For theparameters 0 and 0 we experimented with
combinations so as to givea South-North consumption ratioof 0.6 at thebegin-
ningof phase (II) in Fig.4. This roughlycorresponds to GDP percapitaat PPP
observedforSouth Korea and Taiwanrelativeto thatin the UK. We obtained
/ = 1.35 and 0 = 0.07. Finallyour centralvalueofK was chosento locatea point
abouthalfwaybetweentheimitation-only and innovation onlyphasesintheSouth
at ac = 0.6. This gave -= 0.09.
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