No. 630 - Endogenous growth and trade liberalization between asymmetric countries

The paper presents a general equilibrium model of endogenous growth and trade between two countries, an advanced country (A) and a backward country (B). The development stage is summarized by the level of knowledge stock accumulated through R&D investments. Producers of intermediate goods, operating under increasing returns to scale and monopolistic competition, perform R&D investments to obtain process innovations (reduction of production costs) if they are incumbents, or product innovations if they are new entrants. The model shows that convergence in long-run growth rates can be obtained even in the absence of international technology spillover, in which case, under the assumption of no variety overlap, the gain from trade will be only static. Dynamic effects will be delivered instead in the presence of an initial overlap in the varieties produced in the two countries, together with a wide gap in unit production costs. In this case it is shown that the impact of trade liberalization on firms’ profits could generate a cumulative causation process which may lead to a polarization of innovative productions in the advanced country.