Imitation, Innovation and International Trade

Abstract

A North-South country model with imitation, innovation and simplified tariff structure is developed in this paper. Peculiar to this paper is that effects of change in trade policy on imitation and innovation in steady-state is analyzed. Specifically, two mechanisms through which trade affects imitation and innovation are noticed. First, higher trade barrier leads to higher imitation and innovation cost but higher gain if succeed in imitation and/or innovation in Southern country. Second, higher tariff lowers profit of Northern firms. Therefore, net effect on imitation and innovation in Southern country is ambiguous while innovation effort is likely to shrink in Northern country. Numerical solutions of the equilibrium system reveal the followings. Innovation and imitation activity is generally bigger in free trade, which is generally in line with theoretical expectation. It is also found that assumption on relative cost structure of imitation to innovation is crucial. In particular, if relative cost of innovation to imitation becomes lower due to higher trade barrier in Southern country, Southern innovation turns out to keep growing with higher level of tariff protection. Nevertheless, it is noticed that aggregate innovation activity in the world monotonically decreases as tariff rate goes higher.