Endogenous Growth, Absorptive Capacities and International R & D Spillovers

Hutschenreiter, G., Kaniovski, Y.M., & Kryazhimskiy, A.V. (1995). Endogenous Growth, Absorptive Capacities and International R & D Spillovers. IIASA Working Paper. IIASA, Laxenburg, Austria: WP-95-092

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Abstract

Interaction between own research and externally produced knowledge has been observed both at the firm and the macro level. This paper intends to fill a gap between endogenous growth models which treat knowledge capital as either a purely national or global public good. As a generalization, we introduce "absorptive capacities" of a smaller country "tapping" the knowledge stock of a larger autarkic country (the technological leader, evolving along its steady state) by means of own investment in R&D into an endogenous growth model with brand proliferation due to Grossman and Helpman. The asymptotic behavior of the ensuing non-linear dynamic model is analyzed in detail. Long-run solutions for the variables representing the evolution of the follower country are compared with the perfect-autarky steady states for both countries. Along a trajectory consistent with perfect foresight in the valuation of the firm, the follower's long-run rate of innovation approaches that of the leader which implies an improvement in the long-run innovative and growth performance of the follower as measured against the perfect autarky benchmark. The limit ratio of the knowledge stocks originating in the two countries is calculated explicitly. The present model is richer in its dynamic behavior than the basic model of brand proliferation. Unlike the basic model, an originally stagnant, non-innovating follower economy might still be able to embark on an equilibrium trajectory with ongoing innovation, in particular when it is linked informationally to a rapidly innovating leader. The model accounts for a number of observed facts about international economic growth. Perfect-foresight trajectories resulting in catching up and secular changes in leadership by taking over in terms of knowledge stocks and total factor productivity are generated by the present model under well-defined conditions. At the same time, the opportunities of catching up and taking over are shown to be limited in the sense that the backward and forward time-lags vis-a-vis the leader tend to finite values. While long-run rates of innovation and growth are equalized, implicit transitional growth differentials give rise to statements about convergence (or divergence) across countries depending on the set of conditions prevailing in the two countries initially.

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