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Markets, Externalities, And The Dynamic Gains Of Openness

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  • Alexander Monge‐Naranjo

Abstract

Inflows of foreign knowledge are key for developing countries to catch up with the world technology frontier. I construct a model to analyze the entry decisions of foreign firms and the incentives of domestic firms to invest in their own know‐how, given the exposure to foreign ideas and competition. The model embeds two diffusion mechanisms typically considered separately in the literature: externalities and markets. I find that openness allows developing countries to fully catch up only when market transactions dominate the diffusion of ideas. Externalities are never enough to catch up and may lead to losses in income and welfare.

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  • Alexander Monge‐Naranjo, 2019. "Markets, Externalities, And The Dynamic Gains Of Openness," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 60(3), pages 1131-1170, August.
    • Handle: RePEc:wly:iecrev:v:60:y:2019:i:3:p:1131-1170
    DOI: 10.1111/iere.12381
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    More about this item

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • O19 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • O34 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Intellectual Property and Intellectual Capital
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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