| Abstract: |
In this paper I consider two symmetric countries/regions which trade in final
goods. In each country is active the manufacturing sector and both vertical
and horizontal innovation conduced by individuals with heterogenous ability. I
show that a more globalized world, as represented by lower iceberg-type
transportation cost, spurs human capital accumulation, and widens skill
premium within each country. However, it may be the case that globalization
reduces the per-capita output growth rate of each region, but has positive
effect on output level. Moreover, when a region has larger domestic market it
also has higher human capital accumulation, higher skill premium, and higher
per-capita mass of product lines, i.e. the country with larger domestic market
invents a larger mass of varieties. This implies that skilled labor force
residing in larger domestic market benefits of higher consumption flows. I
show that even if a country has larger domestic market full agglomeration of
either activity does not happen : both the regions remain active in both
manufacturing and R&D. I show that the same result hold in the case of
localized spillovers and specialized knowledge between regions. |