Green Innovation and Economic Growth in a North–South Model

If one region of the world switches its research effort from dirty to clean technologies, will other regions follow? To investigate this question, this paper builds a North–South model that combines insights from directed technological change and quality-ladder endogenous growth models with business-stealing innovations. While North represents the region with climate ambitions, both regions have researchers choosing between clean and dirty applications, and the resulting technologies are traded. Three main results emerge: (1) In the long run, if the North’s research and development (R&D) sector is sufficiently large, researchers in South will follow the switch from dirty to clean R&D made by researchers in North, motivated by the growing value of clean markets. (2) If the two regions direct research effort toward different sectors and the outputs of the two sectors are gross substitutes, then the long-run growth rates in both regions will be lower than if the global research effort were invested in one sector. (3) If the North’s government induces its researchers to switch to clean R&D through clean technology subsidies, the welfare-maximising choice for South is to ensure that all of its researchers switch too, unless the social discount rate is high. The last result is true even if the South’s R&D sector is large.