This study develops a model wherein capital is used in final goods production and research and development (R&D) activities. This arrangement generates changes of the equilibrium capital allocation corresponding to capital endowment, which engenders a regime change from capital based growth with decreasing returns to R&D based perpetual growth. These two growth phases account for the polarization of economies. The model also engenders multiple equilibria on capital allocation-which emerge during the middle stages of capital accumulation-accounting for leapfrogging and the instability of the economic growth of developing countries with medium capital accumulation. JEL Classification Numbers: E22, O11, O14, O31, O41.

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Several empirical studies suggest that advanced economies experience a growth regime switch from factor accumulation to knowledge accumulation. To investigate the mechanism of such a regime switch, this study develops a concise and flexible dynamic model based on Romer (1990) by introducing two types of endogenously supplied R&D input capital. The model replicates the growth patterns of developed and underdeveloped nations, clarifies the important role that capital plays in the difference between them, and presents several implications for interest-rate subsidies and official development assistance. Further, it shows that if a country enjoying long-run growth has little initial capital, its initial economic development will be based on capital accumulation. When the capital stock becomes sufficient for supporting R&D, the economy will achieve long-run growth through R&D.

Working time has gradually decreased in the last few decades, along with the continuing growth of advanced economies. Furthermore, there have been some empirical evidence showing emerging economies’ and long-run experiences of advanced economies’ decreasing labor in spite of restrictions on labor statistics. To replicate these phenomena, we develop the model with endogenous technogical chnage and endogenous labor supply, and we find that adding increasing returns of R&D (reasech and development) efficiency, at least for the small input, yields the economic path accompany the decreasing labor supply. Furthermore, the path is stable (not saddle stable), so the steady state has multiple paths under rational expectations, which yields local indeterminacy. This would reflect the modern intermittently-coming economic shocks in both advanced and emerging countries. Furthermore, the model also contains a steady state with no growth trap, and selection among steady states is possible. The model has global indeterminacy, which would be one of the mechanisms for the start of economic growth.

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