R & D Sector Outsourcing, Human Capital Formation and Growth in the Context of Developed versus Developing Economies

A skill-biased endogenous growth has model has been considered where Research and Development (R & D) producer of the advanced economy outsource its R & D activity to a relatively technologically backward economy. R & D producer of the advanced economy endogenously determines the equilibrium proportion of R & D activity which takes an intermediate value. An advanced economy relies on the innovation activity for its technology improvement. Whereas a backward economy depends on both the imitation and the innovation activities - innovation being more skilled-intensive than imitation. This paper theoretically examines the impact of R & D outsourcing from an economy which is in the innovation-only regime to an economy which is in the imitation-innovation regime. It shows that dependence on the imitation activities rises and as a consequence of which proportion of skilled human capital falls and both skilled and unskilled human capital shift away from the innovation to the imitation activities in the backward economy. This also leads to a higher wage rate of both skilled and unskilled human capital in the backward economy. As a result proportion of outsourcing from advanced economy to backward economy falls. However, growth rate of the backward economy initially rises and eventually declines as time progresses. In the long run backward economy will get into a low equilibrium trap and gap from the world technology frontier widens.