Innovation and imitation in a model of North-South trade

This paper analyzes the growth and welfare effects of trade openness within a North-South framework that predicts the observed intra-industry trade and the North-South specialization over different quality vintages within product lines. The model is used to re-examine the relationship between the innovation in the North and the imitation lag of the South and to address the implications of the (weak) international Intellectual Property Rights (IPR) protection. When the imitation technology is modeled as a function of increasing complexity of targeted products, opening to trade increases the growth rate and welfare of both regions, but results in a larger North-South quality gap. While a full catch-up is possible with no protection of ideas flow, but also with no trade, the quality gap is always positive under full economic integration including trade in goods. Stronger IPR protection increases the gap and has a negative effect on the world growth rate and welfare. (C) 2012 Elsevier B.V. All rights reserved.