By studying a specific market failure common in many developing countries,
this paper argues that globalization may indeed amplify income disparities. First,
it shows that North-South trade can generate divergence, through the endogenous
response of technical change, if developing countries do not provide adequate protec-
tion of intellectual property rights (IPRs). Since innovators cannot fully appropriate
the fruits of their work in developing countries, specialization in production due to
trade opening translates into a shift of R&D effort towards the activities performed
in rich economies only. Therefore, trade induces “innovation diversion”, making the
sectors in which poor countries enjoy a comparative advantage relatively less pro-
ductive. Second, the paper shows that the uneven distribution of technical progress
potentially brought about by trade can also undermine incentives to innovate, so
that divergence can open the door to stagnation.
To make this argument, the paper builds a Ricardian model with endogenous,
sector specific, technical change. Two sets of countries, the North and the South,
are distinguished by exogenous sectoral productivity differences. Except for this
Ricardian element, defining the pattern of comparative advantage, countries have
access to the same pool of technologies, whose productivity can be increased by
innovation. Innovation is financed by the rents it generates, but in the South some
rents are dissipated due to imitation. The model is solved under autarky and free
trade and the two equilibria are compared. In both cases, the equilibrium has a
number of desirable properties: the world income distribution is stable, growth rates
are equalized across sectors, countries with higher exogenous productivity levels are
relatively richer. But the world income distribution depends crucially on the trade
regime. With no commodity trade, each country produces the whole range of goods
and therefore each innovator, serving the world economy, obtains both the high rents
from the North and the smaller rents form the South. Under free trade, instead,
each country specializes in the sectors where it has a comparative advantage and
innovators obtain the rents from one location only. Since the rents from the South are
smaller, the Southern sectors attract less innovation which, over time, reduces their
productivity. This is the first result of the paper: in a world where poor countries
provide weak protection for IPRs, market integration shifts technical change in favor
of rich countries.
Is then North-South trade always beneficial for advanced economies? The some-
how surprising answer, leading to the second result of the paper, is not necessarily:
under free trade, weak IPRs have a strong potential to disrupt incentives for inno-