Intersectoral Spillovers, Relative Prices and Development Traps

Abstract

Why is the economic growth rate so low in poor countries? This paper offers an explanation by using a simple two-sector AK growth model with intersectoral linkages and high relative prices of intermediate goods.Intersectoral linkages lead to two balanced growth paths (BGPs). The high-growth BGP is a source. The low-growth BGP is a sink because it has a small final goods sector, small intersectoral spillovers from the final goods sector to the intermediate goods sector, and small marginal products in the intermediate goods sector, yielding high relative prices of intermediate goods. The low-growth BGP is an attractor and thus development trap.To produce a big push effect, this paper analyzes the first-best policy and finds that a subsidy to own consumption and a provision of public goods to the final goods sector can internalize the external effect and render the low-growth BGP infeasible. As a result, there is only the high-growth BGP.

PRC Outward Investment in the USA and Europe: A Model of R&D Acquisition

“…We presume that there must be sufficient positive "spillover" effects to justify the large sums of OFDI by PRC state-owned TNCs in their M&A activities. The empirical literature attempting to explain PRC state-owned TNC activities is inconclusive and without much theoretical underpinnings (Todo et al, 2011;Chen and Lee, 2012;Li, 2012;Szamosszegi, 2012;Bowman et al, 2013). We attempt to fill this gap by presenting, in section 2, a reasonable theoretical explanation of PRC OFDI in search for "spillover effects" in a two-country model with firms distinguished by their ability to innovate.…”