Abstract
A model is proposed where economic growth is driven by innovation alongside the diffusion and adoption of technology from the frontier. Innovation investments are related to households savings, which generates multiple equilibria with low and high levels of innovation and productivity. Low-level equilibria are unstable. Starting from a position with low levels of investment and innovation, increasing investments are associated with high but decreasing dependence on international technology diffusion. A major objective of policy-making is to increase investment sufficiently in the lower end to reach the high-level steady state. An economic rationale is provided for the existence of productivity improving equilibria, where distance to the frontier is reduced based on a tax and subsidy mechanism designed to boost innovation and speed up catching-up.
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