the autarky growth rate of the economy can be found as:
jf φ (ifʌ1-^ di
(l-σ)∕σ
- P
(14)
Consider now the set S of poor countries (the South). In the aggregate, the South
is assumed to have a schedule of exogenously given productivity, φs, different from
that of the North, Φn . This Ricardian element captures the fact that geographic,
cultural and economic differences (taken as exogenous) make the South relatively
more advantaged in some activities compared to the North, even when technological
knowledge is common. Following Dornbusch et al. (1977), sectors are conveniently
ordered in such a way that the index i ∈ [0,1] is decreasing in the comparative
advantage of the North, i.e., Φn (i) ∕φs (i) > Φn (j) ∕φs (j) if and only if i < j. To
further simplify the analysis, assume that Φn (i) is weakly decreasing in i and φs (i)
is weakly increasing in i, so that the most productive sector in the North is the least
productive in the South. To start with, consider the case of no protection of IPRs
in the South. Still, the South is allowed to imitate at a small cost the innovations
introduced in the North, so that the endogenous component of technology, a(ι), is
identical in all the countries. This assumption reflects the quasi public good nature of
technical progress, according to which only IPRs protection can exclude others from
exploiting past discoveries. For simplicity, the analysis adopts a stylized description
of the R&D sector in which innovators produce for the world economy and the cross-
country distribution of the R&D cost is proportional to the net revenue accruing
to the innovator in each country.17 With no IPRs protection in the South and no
trade, the Northern equilibrium is unaffected by other countries. In particular, the
sectoral distribution of technical progress, a(ι), is determined by (13) according
to the exogenous productivity index of the North, Φn (i). The only difference in
the South is that technical progress, embedded in α(i), is taken as given from the
North.18 Using equations (9) and (13) yields the North-South wage ratio, ω ≡
17This assumption makes the localization of R&D irrelevant for the purpose of the analysis.
Equivalently, the localization of R&D could be studied by allowing profit transfers between countries
in terms of Y. In any case, given the small size of the R&D sector, about 2% of GDP in advanced
countries and much less in the rest of the world, this simplification seems innocuous.
1aIn the South, each machine i will be produced by a monopolist, as in the North. In presence
of a small imitation cost, no two firms have an incentive to produce the same machine because
price competition would lead them to negative profits. The postulated independence between the
monopoly distortion in the imitating South and its IPRs regime is dictated by simplicity and
precludes the analysis of the trade-off between the dynamic loss and the static benefit of weak IPRs
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