Technology adoption, innovation policy and catching-up

A model is proposed where economic growth is driven by innovation along
the diffusion and adoption of technology from the frontier. Business
innovation investments are related to households savings, which
generates equilibria with low levels of, and equilibria with high levels
of, innovation. Low-level equilibria are unstable. Starting from a
position with low levels of investment and innovation, increasing
investments are associated with high but decreasing dependence on
international technology diffusion. A major objective of policy-making
is to increase investment sufficiently in the lower end to reach the
high level steady state. An economic rationale is provided for the
existence of productivity improving equilibria, where distance to
frontier countries is reduced owing to a tax and subsidy mechanism
designed to boost innovation.