Advantages of backwardness and forwardness with shifting comparative advantage

This paper develops a multi-sector endogenous innovation model that is able to account for the dynamics of comparative advantage of each sector within the economy. The model in this paper assumes that two kinds of learning effects exist in R&D: advantages of backwardness and forwardness. It is shown that if the economy is divided into advanced and backward sectors, in the latter sectors, the advantage of backwardness dominates, leading to cyclic repetition of comparative advantage. However, in the former sectors, the advantage of forwardness becomes more significant, so comparative advantage among these sectors stabilizes. Thus, the direction of learning spillovers has a critical effect on the dynamics of comparative advantage. Given this result, it is shown that only R&D policies for the marginal sector are effective in facilitating economic growth. If a decision is made to facilitate R&D investment within advanced sectors, R&D taxes, rather than subsidies, should be imposed on this marginal sector. Moreover, it is shown that trade liberalization does not affect the intrinsic dynamics of comparative advantage among surviving sectors in the economy if the locus of this marginal sector does not change significantly after trade liberalization.