Innovation and Manufacturing Offshoring with Fully Endogenous Productivity Growth
85th International Atlantic Economic Conference(2016)
Abstract
This paper investigates the relationship between net offshoring patterns for innovation and manufacturing and fully endogenous productivity growth in a two-country model. The occupational choice of skill-differentiated workers into low-skilled employment in production and high-skilled employment in innova- tion determines labor market allocations, and perfect investment mobility allows firms to shift innovation and manufacturing independently between countries. These mechanisms generate a tension between access to technical knowledge and low-cost high-skilled labor in the location decision for innovation, which results in innovation and manufacturing tending to concentrate in the asset-wealthy (asset-poor) country when trade costs are high (low). The model exhibits a positive relationship between innovation costs and the concentration of industry and innovation, ensuring that a rise in knowledge diffusion between countries coincides with increases in net offshoring flows in innovation and manufacturing from the asset-wealthy country to the asset-poor country, and a faster rate of productivity growth, when the asset-wealthy country has larger shares of innovation and production.
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Key words
productivity,innovation,manufacturing,growth
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