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The authors develop a model in which the proportion of Northern firms choosing to become multinationals is endogenous. In the benchmark model, Northern firms engage in innovation based on the local knowledge stock and learning-by-doing (LBD), and a share of these products is transferred to Southern production via FDI. An increase in Southern imitation limits the multi nationalization rate. They extend the model to permit Southern innovation based on the amount of local knowledge and LBD. Because Southern firms have higher innovation costs, this generates inefficient specialization in both regions and reduces global growth.
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