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MARKETS, EXTERNALITIES, AND THE DYNAMIC GAINS OF OPENNESS
Author(s) -
MongeNaranjo Alexander
Publication year - 2019
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/iere.12381
Subject(s) - openness to experience , externality , incentive , economics , competition (biology) , developing country , welfare , international economics , construct (python library) , microeconomics , monetary economics , market economy , economic growth , psychology , social psychology , ecology , computer science , programming language , biology
Abstract Inflows of foreign knowledge are key for developing countries to catch up with the world technology frontier. I construct a model to analyze the entry decisions of foreign firms and the incentives of domestic firms to invest in their own know‐how, given the exposure to foreign ideas and competition. The model embeds two diffusion mechanisms typically considered separately in the literature: externalities and markets. I find that openness allows developing countries to fully catch up only when market transactions dominate the diffusion of ideas. Externalities are never enough to catch up and may lead to losses in income and welfare.