SOUTHERN INNOVATION AND REVERSE KNOWLEDGE SPILLOVERS: A DYNAMIC FDI MODEL

We develop a general equilibrium model of endogenous innovation and foreign direct investment (FDI). In the benchmark model, Northern firms innovate with the help of localized spillovers, and a share of new products is transferred to Southern production via FDI. An increase in Southern imitation risk reduces this share. In the extended model, we permit higher-cost Southern innovation, which yields inefficient specialization in both regions and reduces global growth. However, it generates a U-shaped relationship between FDI and local imitation. We also allow for reverse spillovers in knowledge to Northern innovation, which partially restore global efficiency and growth.