Innovation, Imitation and Entrepreneurship

This paper analyzes the gradual shift in the technological paradigm of an economy as it approaches the world technology frontier. The model developed in this paper consists of firms which employ skilled workers as an important input in technological advancement, but the novel feature here is the entrepreneur, who is the brain of technological progress. The entrepreneur has to decide to undertake either imitative or innovative activities, of which decision both affects and is affected by the country’s distance to frontier. Specifically, the entrepreneur needs to have a minimum ability threshold level in order to carry out innovation. This endogenous threshold level falls as the economy moves closer to the technological frontier, enabling more entrepreneurs to be engaged in an innovation-based strategy, and consequently, moving the economy from a technological structure that is based on imitation of foreign technologies to one where domestic innovation dominates. The transitional dynamics of the model shows that there exists a steady state distance from the world frontier that countries will eventually converge to. We also find that it is possible for countries under certain conditions, to be trapped in a regime carrying out only imitation of world technologies.