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Perpetual leapfrogging in international competition

Furukawa, Yuichi (2012): Perpetual leapfrogging in international competition.

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Abstract

Technological leadership has shifted at various times from one country to another. We propose a mechanism that explains this perpetual cycle of technological leapfrogging by incorporating knowledge spillovers into a two-country model of innovation including the dynamic optimization of an infinitely lived consumer. In the model, the stock of knowledge accumulates in each country over time because of domestic innovation and spillovers from foreign innovation, while spillovers take place through imitation and foreign direct investment. We show that if the rate of imitation is high, only the technologically leading country innovates in equilibrium (a North-South regime) where leapfrogging never arises. Conversely, if the imitation rate is sufficiently low, both countries innovate in equilibrium (a North-North regime), and so technological leadership may shift first from one country to another, and then if the international spillovers are sufficiently efficient, may perpetually alternate between the two along an equilibrium path.

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