Innovation and Imitation at Various Stages of Development: A Model with Capital

Abstract

A simple model of technological imitation and innovation is developed to explain club convergence in the evolution of the distribution of per-capita GDP over countries. Two versions of the model are studied and compared. The first one includes only innovation-imitation tradeoff, and the second one takes into account traditional investment decisions as well. It is shown that the introduction of capital does not affect the general structure of stationary equilibria: in both versions, there are three types of stable steady-state regimes, with only imitation, only innovation or a mixed policy. Using World Bank and ICRG statistical data for the period of 1980-1999, we test our hypothesis about the dependence of innovation and imitation costs on the relative productivity level, savings rate and an indicator of institutional quality. An appropriate choice of adjustment parameters of the model gives a possibility to generate trajectories of more than 80 countries and, for most of them, obtain qualitatively correct pictures of their evolution. The set of these trajectories reveals club convergence. It is shown that taking into account the evolution of the capital stock improves the quality of approximation.