In Discussion Paper No. 1489, Michael Chiu, Joseph Pearlman, and Research Fellows David Currie and Paul Levine examine the effects of imitation and innovation on global trading patterns and growth. A previous study by Grossman and Helpmann (1991) addressed the issue of imitation by developing countries (‘the South’) of developed countries (‘the North’). This paper goes further, developing an endogenous growth model which captures the South’s evolution through to innovation in its own right – a refinement of particular relevance to Pacific Rim economies. It also explores the impact of R&D subsidies on the South’s development.

Several global implications emerge from their analysis. First, that it is in the North’s interest to subsidize Southern innovation, as such innovation raises global steady state growth. Subsidies to Southern imitation or Northern innovation are, by contrast, likely to lower it. Second, the authors highlight the particular attractiveness of subsidizing education, which increases the South’s ability to assimilate Northern technical skills and commercial knowledge. The paper concludes by pointing out the importance that such efforts be coordinated at an international level.

Phases of Imitation and Innovation in a North-South Endogenous Growth Model
David Currie, Paul Levine, Joseph Pearlman and Michael Chui