Abstract
This paper extends and surveys some basic quality-ladder models of education, innovation and trade in order to explain the dynamics of technological change and aggregate growth in developed countries. We analyze how the stochastic processes of innovation and export adaptation are affected by asymmetric factor endowments, transport costs, and barriers to entry in foreign markets. We show that the country-specific innovation rates are permanently increasing in the effectiveness of education and the countries’ relative endowment with labor. Trade liberalization leads to a temporary increase in the innovation rates but to a permanent increase in the rates of export adaptation.
Highlights
Schumpeterian growth theory is dominated by R&D-based growth models in which stochastic processes of product innovation serve as engine of growth
We present a class of quality-ladder models of education, innovation and export adaptation to explain the evolutionary dynamics of industries, economic growth, and international trade
A shortcoming of these non-scale models is, that the innovation and per-capita growth rates depend proportionally on population growth. Without population growth these models predict a stationary equilibrium without innovation and growth
Summary
Schumpeterian growth theory is dominated by R&D-based growth models in which stochastic processes of product innovation serve as engine of growth. A large part of these models is based on the North-South setting where the world economy consists of the developed countries (or regions) in the North on the one hand, and the developing countries (or regions) in the South on the other hand This framework is adequate to study international product cycles driven by stochastic sequences of innovations in the North and imitations in the South (e.g. the survey by Stadler [14]). The idea is to integrate a fully endogenous quality-ladder model into a North-North trade framework in order to analyze the influence of relative factor endowments, transport costs and barriers to entry in foreign markets on the dynamics of innovation and growth. A different initial value of households’ human capital can be captured by different labor endowments without loss of generality
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