Trade Dynamics with Innovation and Monopolistic Competition

Chapter 9 dealt with issues related to economic growth with endogenous human capital and knowledge. Although knowledge was treated as an exogenous variable, the model had a limitation if one wants to know in the microeconomic level about what are the motives for private companies to make innovation and for individuals to get educated. For instance, in the previous chapter, knowledge stock, Z(t), receives no compensation, and every individual is assumed to be free to exploit the entire stock of Z(t). Although these models are congruous with that technological change drives economic growth and the knowledge is a nontrivial good, they don’t explain why profit-maximizing private firms would make efforts to generate technological changes. The ‘new’ endogenous growth pioneered by Romer (1986) and Lucas (1988) has attempted to explain technical change as the outcome of market activity in response to economic incentives. In the new growth theory, technological change does not take place in a predetermined fashion without any social and economic costs. The new growth theory has modeled endogenous knowledge accumulation through many channels, including formal education, on-the-job training, basic scientific research, learning by doing, process innovations, industrial innovations, and product innovations. The crucial assumption that leads to sustainable endogenous growth is the existence of increasing returns to scale in economic production under monopolistic competition. This chapter presents some of the key ideas in the approach in international trade theory. Section 10.1 introduces a dynamic, two-country growth model with trade in which endogenous technical change results from the profit-maximizing behavior of entrepreneurs. Section 10.2 is concerned with the role of intellectual property rights (IPRs) in encouraging firms in developed countries to innovate and in helping developing countries gain access to knowledge on the global frontier. The section introduces a dynamic generalequilibrium product-cycle model to analyze the effects of Southern IPRs on incentives of Northern firms to innovate and to license state-of-the-art technologies to the South. The quality-ladders model with endogenous innovation and licensing integrates licensing into the theory of endogenous product cycles. Section 10.3 introduces trade costs into North-South endogenous growth model. The model tries to analyze interactions among factor endowments, trade costs, production location, and growth. Section 10.4 introduces a model of growth and innovation of a small economy. The small country faces perfectly elastic demand in world markets and trades at exogenously given prices. If the small economy trades on world capital markets, it does so at an exogenously given rate of interest. The R&D activities of the small country does not influence the rate of accumulation of knowledge capital in the world at large. Section 10.5 introduces another important mechanism of economic growth. We introduce a model of economic growth with externalities by Nishimura and Shimomura. The model introduces sector-specific externalities in the Heckscher-Ohlin twocountry general equilibrium model. Section 10.6 concludes the chapter. Section A.10.1 introduces growth model with a variety of consumer products for a national economy. The idea is to introduce a variety of consumer goods into the utility function that parallels the treatment of a variety of intermediate products in the production function as in the previous section. Section A.10.2 introduces the Aghion-Howitt model of economic growth which explains Schumpeter’s process of creative destruction. Section A.10.3 studies technological changes through improving quality of the current products.