We develop a two-country model of endogenous innovation and imitation in
order to study the interactions between these two processes. Firms in the
North race to bring out the next generation of a set of technology-intensive
products. Each product potentially can be improved a countably infinite
number of times, but quality improvements require the investment of resources
and entail uncertain prospects of success. In the South, entrepreneurs invest
resources in order to learn the production processes that have been developed
in the North. All R&D investment decisions are made by forward looking,
profit maximizing entrepreneurs. The steady-state equilibrium is
characterized by constant aggregate rates of innovation and imitation. Ve
study how these rates respond to changes in the sizes of the two regions and
to policies in each region to promote learning.
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