A symmetric Heckscher-Ohlin model of endogenous growth

We study the interaction between production and R&D patterns in a open-economies model of endogenous growth. Unlike existing studies, we treat the two industries entirely symmetrically-both are imperfectly competitive, and engage in sector-specific expanding-product-variety or quality-ladder innovation activities. To achieve a more satisfactory analytical characterization, we eliminate scale effects and impose strict concavity rather than linearity on the contribution of skilled labour to industry R&D. With imperfect international knowledge spillovers, an increase in one country's skilled-labour endowment above the other's affects production and R&D activities in both countries, with the resulting increased production and research specialization across countries raising world innovation rates in both industries. Surprisingly, increasing one country's skilled-labour endowment towards the other's can reduce world innovation rates in both industries, on account of the resulting reduced specialization. Broader implications of the analysis are also discussed.