Catching-up, Falling-behind, and the Role of FDIs – a Model of Endogenous Growth and Development1 By Thomas Gries,

This paper intends to focus on the role of FDIs for the growth and development process. We introduce a simple model of endogenous growth and development which captures a con-vergence as well as a divergence regime. Successful catching–up requires the closing of the technological gap towards the leading countries of the industrialized world. As the country is backward the knowledge and technology acquiring sector is described by a process of im-itation. Foreign direct investments, human capital, and technological spill over e¤ects are important factors for the production of the …nal good as well as for the imitation of tech-nologies. It is shown that the economy will face a divergence regime as long as the domestic factor, human capital endowment, is below a critical level. Although FDIs are important for the process of technological catching–up, the switching condition for upgrading as well as the …nal level of the technological position is solely determined by the stock of domes-tic resources. Without a su¢cient domestic factor, no take-o ¤ to a dynamic catching-up process takes place. Therefore, the results emphasize the importance of domestic resources. The role of FDIs as a sole source of foreign technologies may be overestimated, especially with respect to the question of convergence or divergence. Having reached a critical leve