The New Product Choice of an Innovating Country

Abstract

We analyze a North-South product-cycle model where the innovating North can choose both the rate of product innovation and the allocation of new products between two multi-commodity sectors, one in which it has a comparative advantage and the other in Which the South has a comparative advantage. The relative wage of the North is an increasing function of its penetration in the Southern sector. If the degree of comparative advantage is below a critical point, the North maximizes its welfare by invading the Southern sector, resulting in global inefficiency. However, with a licensing agreement, Pareto improvement can be made through bargaining between the two countries.