Process Spillovers and Growth

This paper develops an R&D based endogenous growth model in which the firm’s free-riding behavior, prompted by an incomplete technological protection at the industry level, can drive economic growth. Unlike existing endogenous growth models, it shows how free-riding behavior and process spillovers can mutually promote dynamic competition at the industry level and how they constitute a major source of growth in the economy. In the dynamic general equilibrium model that we propose, the representative industry is a duopoly that consists of a leader who innovates and a laggard who freerides by exploiting the source of intraindustry spillover. The main results show that the innovation strategies of the two firms can be dynamically strategic complements if a large technology gap prevails and that a fall in the level of technological protection can enhance economic growth. This paper is a substantially revised version of a chapter of S. Luckraz’s Ph.D. thesis. He thanks Julian Wright for his encouragement and helpful suggestions. The paper has also benefited from the comments of Jie Zhang, Mark Donoghue and Ho Kong Weng. The author is also grateful to T.L. Vincent and three anonymous referees for their comments.