Globalization, economic growth, and innovation: A two-country two-period model

2026-06-22

AI Summary

This study addresses the disadvantage faced by developing countries in globalization due to substantially lower total factor productivity (TFP) relative to advanced economies. By constructing a two-country, two-period dynamic general equilibrium model that incorporates both autarky and globalization phases, the paper analyzes the effects of trade liberalization and potential policy responses. It demonstrates that developing countries can allocate a portion of their capital to innovation during the autarky phase to enhance TFP, thereby securing positive gains once integrated into global markets. This strategy transcends the conventional static comparative advantage framework, showing that even with initially low TFP, upfront investment in innovation enables developing nations to benefit from trade openness.

Abstract

This paper examines how a developing country can benefit from trade liberalization. We develop a two-period model, comprising an autarky phase and a globalization phase, and a two-country framework, featuring a developing country and a developed country (representing the rest of the world). Our findings indicate that globalization may disadvantage a developing country when its total factor productivity (TFP) is significantly lower than that of the developed country. However, we demonstrate that the developing country can still achieve gains from trade openness by allocating part of its capital to innovation during the autarky period, thereby enhancing its TFP.

Problem

• globalization
• trade liberalization
• total factor productivity
• developing country
• innovation

Innovation

• two-country two-period model
• trade liberalization
• total factor productivity (TFP)
• innovation investment
• economic development