#90-DOF-6 "International Links of Innovation Patterns"
(Elhanan Helpman, January 1990.)
A WHOLE SENTENCE
ABSTRACT
The traditional theory of economic growth has concentrated on
capital accumulation, exogenous population growth and exogenous
technical progress. Indeed, capital accumulation and labor growth
proved to be important components in the explanation of growth
patterns, but capital accumulation and labor growth alone explain only
part of observed growth rates. The rest has been typically attributed
to technical progress (see Solow (1957) for the original contribution
and Maddison (1977) for a recent discussion of growth accounting) .
It has been clear, however, from the very beginning that exogenous
technical progress cannot be a satisfactory working hypothesis. Major
productivity gains require a deliberate effort of invention an
innovation, especially in modern times (see, for example, Freeman
(1982)). The latter implies that resources need to be devoted to these
activities. In order for these resources to be forthcoming, however,
the economic system has to properly reward inventors and innovators,
thereby providing incentives to engage in these activities. All this
is rather self evident, but direct measurement of the contribution of
inventions and innovations to economic growth proved to be very
difficult (see Griliches (1979)). Part of the difficulty results from
the lack of satisfactory data for the problem at hand. But another
part of the difficulty results from the lack of a satisfactory theory.
Following the general slowdown of productivity growth in the 1970s
the interest in economic growth has been renewed. This has been
manifested in the publication of numerous empirical studies that
attempt to explain the events of the seventies. More recently, however,
the theory of economic growth has also been modified in order to deal
with the new concerns. The new approaches emphasize factors that lead
to sustained long run growth at rates that are endogenously determined.
This constitutes an important departure from traditional theory in
which long run growth was exogenously determined. The new studies have
proceeded along several lines:
(i) Endogenous population growth (Becker and Murphy(1988).
(ii) The role of public services (Barro (1989)).
(iii) Accumulation of human capital (Ohyama (1989).
(iv) Learning by doing and related spillovers (Romer(1986, 1988) and
Lucas(1988)).
Although learning by doing has been explored in the earlier literature
(see Arrow (1962) for the original contribution as well as Uzawa (1965),
Levhari (1966) and Sheshinski (1967)), its recent combination with an
explicit treatment of product innovation - - in the form of
development of new products or the improvement of existing products --
has yielded important new insights on endogenous technical progress
(see, for example, Romer(1988) and Aghion and Howitt (1989)).
This study is concerned with international links of innovation
patterns, where innovation drives economic growth. Such links have
been explored in a series of papers by Grossman and Helpman (1989a-e)
for long run steady states. (Grossman (1989) has also used it to
explain Japan's recent performance.) They showed in a variety of
models that build on endogenous product innovation how the long run
growth rate of a country depends on its own features, features of its
trading partners, its own trade policy, trade policy of its trading
partners, its own policy towards innovation and imitation and its
trading partners' policies towards innovation and imitation. These
links proved to be rather involved. For example, a less developed
country that encourages imitation of products that have been
originally developed in an advanced industrial country may thereby
speed up growth around the globe.
In what follows I study the time pattern of endogenous innovation,
including out of steady state dynamics. For this purpose I employ a
simplified version of a model developed in Grossman and Helpman (1989a).
In that model the growth rate is closely associated with the rate of
innovation. Two major questions will be addressed:
(i) How do the time patterns of innovation and growth respond to a
change in the available resources?
(ii) How do the time patterns of innovation and growth respond to R&D
subsidies?
The first question addresses a structural issue while the second
addresses a policy problem.
Some interesting results emerge from this analysis. For example,
the short run response of the rate of innovation to an R&D subsidy can
differ from the long run response, and short run rates of innovation
can overshoot or undershoot long run innovation rates. The answers to
the policy questions depend on structural parameters as well as on
whether the policy active country has a comparative advantage in
research and development. A summery of the results is provided in the
closing section.
In order to make the paper self contained I present in the next
section a simple one country model in which profit seeking
entrepreneurs develop new products. An expansion of the menu of
available products raises productivity in manufacturing via the
refinement of specialization (as in Ethier (1982)) or it raises
productivity in consumption via an increase in the available product
choice. For this reason a larger product choice is desirable per se.
In addition current product development reduces costs of future
product innovation. This feature captures the idea that even when
targeted at particular products R&D also generates broader knowledge
that can be applied to other products. It thereby leads to the
accumulation of non-appropriable knowledge capital. Knowledge capital
is particularly useful for R&D. Thus, current innovative activities
reduce costs of future innovations. This specification leads to
endogenous innovation and growth, with their rates depending on
available resources and on the government's industrial policy (as in
Romer (1988)) . In the one-country case the rates of innovation and
growth settle down immediately on steady state levels. Therefore in
this case there exist no out of steady state dynamics.
In Section III the model is extended to represent a world of two
countries. With two countries in place there exist non-trivial out of
steady state dynamics. In a stationary environment the rate of
innovation may rise or decline over time (depending on initial
conditions) until it converges to a steady state. In that section I
also analyze the response of its time pattern to changes in available
resources.
The model is further extended in Section IV in order to deal With
industrial policy. I show how the patterns of innovation responds to
R&D subsidies. The resulting changes in these time patterns depend on
whether the policy is enacted by a country with comparative advantage
or disadvantage in innovation. The paper closes with a summary of the
main findings and some concluding comments.
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