Trade, innovation, and growth

Recent papers by Romer and Lucas have reminded us that when investment takes place in an economic environment with increasing returns to scale, the marginal product of capital need not decline over time to the level of the discount rate. Then the incentive to accumulate capital may persist indefinitely, and long-run growth in per capita income can be sustained. These astute observations have revitalized the theory of economic growth. Research attention has focused primarily on the processes of accumulation of knowledge capital, in part because the public good aspects of knowledge as information naturally create increasing returns to scale in many contexts. The advances in growth theory enable us to address rigorously many issues that have long been central to international economics. Growth theorists also stand to gain from recognizing how the international economic environment impinges upon the incentives that firms in specific countries have to invest in the creation of knowledge. Several features of the global economy seem especially important for understanding growth performance. Various aspects of the international trade environment have featured prominently in our own work on innovation and growth in the open economy. In the next section we describe common elements of our research approach. Then, in Section II, we introduce a highly simplified model of trade, knowledge accumulation, and growth, and use it to expound some of our recent findings. -from Authors