Empirically consistent scale effects: An endogenous growth model with technology transfer to developing countries

Scale effects in endogenous growth models have been questioned by the fact that a remarkable increase in the number of scientists and engineers engaged in R&D in the postwar United States was indeed associated with a productivity slowdown. This paper, however, shows that this evidence could be reconciled with scale effects, once technology diffusion from technologically leading countries to followers by foreign direct investment (FDI) is incorporated into a standard model. If FDI requires scientists and engineers of advanced countries to adapt existing technologies to the local environment and to train local workers, the number of scientists and engineers would increase as the magnitude of technology diffusion expands. Also, the emergence of FDI as more profitable opportunities for scientists and engineers could lead to a domestic productivity slowdown in advanced countries.