SOUTHERN INNOVATION AND REVERSE KNOWLEDGE SPILLOVERS: A DYNAMIC FDI MODEL

Yin He and Keith Maskus

International Economic Review, 2012, vol. 53, issue 1, 279-302

Abstract: We develop a general equilibrium model of endogenous innovation and foreign direct investment (FDI). In the benchmark model, Northern firms innovate with the help of localized spillovers, and a share of new products is transferred to Southern production via FDI. An increase in Southern imitation risk reduces this share. In the extended model, we permit higher‐cost Southern innovation, which yields inefficient specialization in both regions and reduces global growth. However, it generates a U‐shaped relationship between FDI and local imitation. We also allow for “reverse” spillovers in knowledge to Northern innovation, which partially restore global efficiency and growth.

Date: 2012
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