Knowledge Diffusion, Trade, and Innovation across Countries and Sectors

Abstract

This paper provides a unified framework for quantifying the cross-country and cross-sector interactions among trade, innovation, and knowledge diffusion. This framework is used to study the effect of trade liberalization in an endogenous growth model in which comparative advantage and the stock of knowledge are determined by innovation and diffusion. The model is calibrated to match observed cross-country and cross-sector heterogeneity in production, innovation efficiency, and knowledge spillovers. The counterfactual analysis shows that a reduction in trade costs induces a reallocation of R&D and comparative advantage across sectors. Heterogeneous knowledge diffusion amplifies the specialization effects of trade-induced R&D reallocation, becoming an important source of welfare. (JEL F12, F14, O33, O34, O41)