R & D , Implementation and Stagnation : A Schumpeterian Theory of Convergence Clubs ∗

We provide a theoretical explanation, based on Schumpeterian growth theory, for the divergence in per-capita income that has taken place between countries since the mid 19th Century, as well as for the convergence that took place between the richest countries during the second half of the 20th Century. The argument is based on the premise that technological change underwent a fundamental transformation in the 19th Century, associated with new scientific ideas and the increasingly scientific content of new technologies. We model this transformation as the introduction of a new method for producing innovations, which we call “modern R&D”. In order to use this method a country’s entrepreneurs must have at least some minimum level of skills, which depends on the technological frontier. Countries not fulfilling this requirement can only create new technologies through an older method, which we call “implementation”. A multi-country Schumpeterian growth model incorporating these ideas implies that countries will sort themselves into three groups. Those in the highest group will converge to an “R&D steady state”, while those in the intermediate group converge to an “implementation steady state”. Countries in both of these groups will grow at the same rate in the long run, as a result of technology transfer, but inequality of per-capita income between the two groups will increase during the transition to the steady state. Countries in the lowest group will grow at a slower rate, with relative incomes that fall asymptotically to zero. Which group a country belongs to in the long run will depend on initial conditions as well as on fundamentals. More specifically, once modern R&D has been introduced, a country may have only a finite window of opportunity in which to raise its skill levels to those required for R&D, failing which the country will remain trapped in implementation or stagnation even if it adopts the same policies and institutions as the world’s technology leaders.