Globalization, Factor Endowments and Scale-Invariant Growth

The paper develops a two-country dynamic general-equilibrium model of growth without scale effects to explore the effects of globalization on long-run growth and wages. Higher quality products are endogenously discovered through stochastic and sequential global innovation contests in which challengers devote resources to R&D and technology leaders undertake rent-protection activities (RPAs) to prolong the expected duration of temporary monopoly power by frustrating the R&D effort of challengers. Globalization (i.e., a move from autarky to an integrated trading equilibrium) for two countries with identical relative factor abundance and possible differences in size does not affect the long-run growth rate of either country. However, the country that is abundant in the factor used intensively in the production of R&D services grows faster in autarky. Moreover, factor prices (adjusted for quality) and national long-run growth rates converge and are eventually equalized. Depending on international per-capita differences in factor abundance, the model also generates intra-sectoral trade, vertical and horizontal multinationals, and international outsourcing of services (R&D investment or RPAs). The growth effects of globalization between countries with different relative factor endowments are larger for smaller countries.