Vertical and Horizontal Innovation : Effects of Globalization and Migration on Inequality, Growth and Human Capital Accumulation

In this paper I consider two symmetric countries/regions which trade in final goods. In each country is active the manufacturing sector and both vertical and horizontal innovation conduced by individuals with heterogenous ability. I show that a more globalized world, as represented by lower iceberg-type transportation cost, spurs human capital accumulation, and widens skill premium within each country. However, it may be the case that globalization reduces the per-capita output growth rate of each region, but has positive effect on output level. Moreover, when a region has larger domestic market it also has higher human capital accumulation, higher skill premium, and higher per-capita mass of product lines, i.e. the country with larger domestic market invents a larger mass of varieties. This implies that skilled labor force residing in larger domestic market benefits of higher consumption flows. I show that even if a country has larger domestic market full agglomeration of either activity does not happen : both the regions remain active in both manufacturing and R&D. I show that the same result hold in the case of localized spillovers and specialized knowledge between regions.