StaffPAPERS FEDERAL RESERVE BANK OF DALLAS The International Product Cycle and Globalization of Production

This paper develops a growth model aimed at understanding the potential effects of globalization of production on rate of innovation, distribution of skilled labor income between the North and South, and welfare of skilled workers in both regions. We adopt a dynamic general equilibrium productcycle model, assuming that the North specializes in innovation and the South specializes in imitation. Globalization of production resulting from trade liberalization and imitation of the North’s technology by the South increases the rate of innovation. In the initial stage of globalization of production, deeper globalization unambiguously improves the welfare of skilled labor in the North, though welfare of Southern skilled labor may still increase. In the later stage, deeper globalization of production unambiguously improves the welfare of skilled labor in the South, though welfare of Northern skilled labor may still improve. JEL codes: F43, O31, O38.