Positive and Negative Externalities in Innovation, Trade, and Regional Economic Growth

Abstract

We analyze the interactions between positive and negative externalities in innovation and trade for economic growth in a region when this region is part of an aggregate economy consisting of two regions. In both regions consumers have constant relative risk aversion preferences, there is human capital use, and there are three kinds of manufacturing activities involving the production of blueprints for inputs or machines, the inputs or machines themselves, and a single final good for consumption. We study two cases. In the first case, there is no growth in the human capital stock but innovative activities give rise to positive externalities or knowledge spillovers in two ways. In this setting, we study whether and under what circumstances opening a region to trade results in an increase in this region’s equilibrium growth rate. In the second case, there is growth in the human capital stock but there are negative externalities in innovation. In this scenario, we show that opening a region to trade leads to more innovation but to no change in its long run growth rate.