Introduction

Writing on “The Role of Technology in the Theory of International Trade,” Ron Jones (1970, p. 85) asked: “What determines technical change?” Jones argued (p. 87) that a sensible approach to answering this question would “entail setting up a distinction between the use of resources to produce [a] commodity and the use of resources to produce new technical knowledge.” He noted further (p. 87) that “expectations as to the future sales must affect the quantity of resources devoted to improving the technology.” Finally, he challenged (p. 89) trade theorists to ponder “how transmittable technical change is from one country to another.” Even in idealized circumstances, he recognized (p. 89), “technical progress in one country may not spill over to actually affect techniques used in other countries.”

Twenty years later, we take up Jones's challenge, using exactly the approach that he proposed. Our analysis focuses on the issue that Jones raised concerning the implications for technical change and for patterns of trade of less than complete international spillovers of the public good that is technical knowledge.

In Grossman and Helpman (1991, ch. 7) we have studied a world economy in which countries share in a common pool of general knowledge capital. A community of industrial researchers in each of two countries combines knowledge capital with two primary resources (human capital and unskilled labor) to generate blueprints for new, horizontally differentiated products. The countries manufacture these “high-technology” products and a homogeneous, traditional good using the same two primary inputs. Trade entails the exchange of the homogeneous good and some unique varieties of differentiated products manufactured in one country for the unique differentiated products of the other.