Phases of imitation and innovation in a North-South endogenous growth model

A North-South endogenous growth model is developed to examine three phases of Southern development: imitation of Northern products, imitation and innovation, and innovation only. We show that the three phases exist as possible equilibria which depend on knowledge spillovers and the ease of imitation. Applying the model to analyse the impact of R&D subsidies, there are some clear policy implications: (I) the welfare effects of subsidies in both blocs depend crucially on the Southern phase; (ii) there are circumstances where the global benefits from subsidies to the South are so substantial as to be Pareto-improving even when fully financed by the North.