R&D, Implementation and Stagnation: A Schumpeterian Theory of Convergence Clubs

Abstract

We construct a Schumpeterian growth theory consistent with the divergence in per-capita income that has occurred between countries since the mid 19th Century, and with the convergence that occurred between the richest countries during the second half of the 20th Century. The theory assumes that technological change underwent a transformation late in the 19th Century, associated with modern R&D labs. Countries sort themselves into three groups. Those in the highest group converge to a steady state where they do leading edge R&D, while those in the intermediate group converge to a steady state where they implement technologies developed elsewhere. Countries in both of these groups grow at the same rate in the long run, as a result of technology transfer, but inequality between them increases during the transition. Countries in the lowest group grow at a slower rate, with relative incomes that fall asymptotically to zero. Once modern R&D has been introduced, a country may have only a finite window of opportunity in which to introduce the institutions that support it.