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  5. Global Innovation and Knowledge Diffusion

Global Innovation and Knowledge Diffusion

Abstract

We develop a Ricardian model of trade where countries innovate ideas that diffuse globally. Our key result provides necessary and sufficient conditions for innovation and diffusion to generate max-stable Fréchet productivity, linking generalized extreme value expenditure to knowledge flows. Innovation makes a country technologically distinct, reducing their substitutability with other countries. In contrast, diffusion generates technological similarity, increasing head-to-head competition and substitutability. In an innovation-only model where countries do not share ideas, productivities are independent across countries and expenditure is CES. Consequently, departures from CES reveal diffusion patterns.

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