Process Spillovers and Growth

This paper develops a non-Schumpeterian endogenous growth model of R&D in which the firm’s free-riding behavior, reinforced by a lack of appropriability in its industry, constitutes a major source of growth in the economy. While models analyzing the interaction between either imitation and innovation or spillovers and innovation have already appeared in the literature, we show how imitation via free-riding behavior and spillovers can mutually promote dynamic competition and hence economic growth. The representative industry, which is of duopolistic market structure, comprises a leader who innovates and a laggard who free-rides by exploiting the source of intra-industry spillover. We find firstly that the innovation strategies of the two firms can be dynamically strategic complements if a large technology gap prevails and, secondly, that there is a case for process reverse engineering as a fall in the level of appropriability results in higher growth.