vation, thereby hurting all countries. As the North becomes relatively richer, more
sectors move to the South, where production costs are lower, and R&D becomes less
attractive for a wider range of goods. Divergence can thus be followed by stagnation.
In the limit case of no IPRs protection at all in the South, this process generates
decreasing returns to innovation and growth eventually stops. Therefore, the model
shows that in a world of interdependent economies, the regulatory policies of each
country are crucial to sustain the growth rate of the entire global system.
These results have important implications. First, they provide strong arguments
in favor of global protection of IPRs. In an era of falling trade barriers and in-
creasing internationalization of production, the enforcement of IPRs in all parts of
the world becomes critical for attracting and sustaining innovation. Second, that
the desirability of IPRs depends on the trade regime can shed light on an observed
change in attitudes of more and less advanced countries towards protection of in-
tellectual property. The importance of dehning common regulations in a global
economy was recognized by the inclusion of the Agreement on Trade Related Intel-
lectual Property Rights (TRIPS) in the statute of the WTO.7 As the relocation of
production in less developed countries can undermine growth in the entire system,
rich economies have indeed a strong incentive to put pressure for a tightening of
global regulations. Similarly, less advanced countries appear more willing to provide
protection for IPRs in exchange for a better access to international markets. In this
respect, this paper is the Hrst to provide a rationale for linking trade liberalization
to a tightening of IPRs and suggests that the TRIPS agreement, despite the criti-
cism of the skeptics, may actually alleviate some undesirable distributional effects of
globalization. Third, contrary to the view of industrial-policy advocates, suggesting
that developing countries should try to target high growth sectors, the model warn
that any sector can become stagnant if incentives to innovation become weak and
that industrial targeting can be less effective than hoped.
The results of the paper are based on four assumptions: specialization driven
by trade, sector-specific technical progress, imperfect appropriability of profits from
innovation in developing countries and an elasticity of substitution between goods
higher than one. All of them seem plausible and are shared by many models. That
countries specialize in different sets of products, at least to some extent, appears
reasonable. More specifically, the Ricardian model has proven to be useful in the
7The TRIPS agreement establishes minimum standards of protection for several categories of
IPRs and a schedule for developing countries to adopt them.