Technology adoption, innovation policy and catching-up

A model is proposed where economic growth is driven by innovation alongthe diffusion and adoption of technology from the frontier. Businessinnovation investments are related to households savings, whichgenerates equilibria with low levels of, and equilibria with high levelsof, innovation. Low-level equilibria are unstable. Starting from aposition with low levels of investment and innovation, increasinginvestments are associated with high but decreasing dependence oninternational technology diffusion. A major objective of policy-makingis to increase investment sufficiently in the lower end to reach thehigh level steady state. An economic rationale is provided for theexistence of productivity improving equilibria, where distance tofrontier countries is reduced owing to a tax and subsidy mechanismdesigned to boost innovation