Innovation, Diffusion, and Trade: Theory and Measurement

I develop a multicountry-model in which economic growth is driven mainly by domestic innovation and the adoption of foreign technologies embodied in traded intermediate goods. Fitting the model to data on innovation, output per capita, and trade in varieties for the period 1996-2007, I estimate the costs of both domestic innovation and adopting foreign innovations, and then decompose the sources of economic growth around the world. I find that the adoption channel has been especially important in developing countries, and accounts for about 65% of their “embodied” growth. Developed countries grow mainly through the domestic innovation channel, which explains 85% of their “embodied” growth. A counterfactual exercise shows that if all countries reached the same research productivity, then (i) the world’s steady-state growth rate would double, and (ii) developing countries would close the gap in terms of both growth rate and income per capita.