Specialization Dynamics, Convergence, and Idea Flows

This paper studies the dynamics of international trade from the perspective of knowledge spillover. Building into an idea-flow model the industry dimension, I integrate four channels of knowledge spillover: each firm could learn from domestic producers as well as foreign sellers, and learning is both intra- and inter-industry. The theoretical framework yields the law of motion of industry-level productivity across countries, capturing strong interdependence of evolution of comparative advantage. I calibrate the model to a large sample of countries. My quantitative results capture important patterns in the data: strong convergence in comparative advantage and substantial mobility in specialization. Based on the law of motion, my decomposition exercise suggests international and inter-industry channels play a major role in knowledge spillover. Various measures are proposed to identify the “key player”, that is, the country or country-industry pair that contributes most to global productivity growth, in the knowledge diffusion network. The calibrated model also suggests dynamic gains from trade are at least one-third of static gains from trade.