Endogenous growth and intellectual property rights: A north–south modeling proposal Mónica L. Azevedo 1 , Óscar Afonso ⁎, Sandra T. Silva University of Porto, Faculty of Economics, CEFUP, R. Roberto Frias, 4200–464 Porto, Portugal abstract article info Article history: Accepted 19 December 2013 Available online 21 January 2014 JEL classifications: O33 O34 O41 Keywords: Intellectual Property Rights (IPR) Economic growth North–south model In this paper, we develop a general equilibrium endogenous growth model that emphasizes the IPR enforcement effects on growth, in a scenario of north–south technological knowledge diffusion. The economy consists of three sectors, and firms are engaged in step-by-step innovation. In line with the literature, we introduce an IPR param- eter that makes imitation more difficult. We find that, in steady state, the increases in IPR protection result in de- creases in the growth rate. This result is in line with the literature, which argues that the enforcement of IPR does not always have a positive effect on economic growth. To sum up, we present some suggestions for future re- search which can help to clarify the relationship between IPR and endogenous growth. © 2013 Elsevier B.V. All rights reserved. 1. Introduction There is a broad consensus in the literature regarding the under- standing of innovation as vital for economic growth (e.g., Aghion and Howitt, 1992; Barro and Sala-i-Martin, 2004; Acemoglu and Akcigit, 2012). Moreover, Intellectual Property Rights (hereafter referred to as IPR) are recognized as relevant for understanding innovation and thus emerge as a crucial determinant for economic growth analysis (e.g., Gould and Gruben, 1996; Glass and Saggi, 2002; Sener, 2006; Dinopoulos and Segerstrom, 2010). According to Falvey et al. (2009) and Chu et al. (2012), we would ex- pect a positive impact of stronger IPR on economic growth. Indeed, in- creasing patent protection raises the R&D incentives and improves technological progress, which in turn decreases economic growth vola- tility, proving that a superior patent breadth leads to a higher expected growth rate. Additionally, it is common among empirical studies to find a net positive effect between IPR protection (measured by a system of patents, for instance) and innovation. In fact, the empirical evidence suggests a positive relationship between this kind of protection and in- novation, despite certain characteristics of the sample, such as the type of countries in the study (for instance, the above result is significant mostly for low and high income countries but not for middle income countries), may bring some bias into the analyses (for a detailed analy- sis of such differences see Azevedo et al., 2012). Within the literature on economic growth, important contributions to the field of IPR have been made in juxtaposition with international trade. Several questions have emerged, such as: what is the optimal en- forcement of IPR in a North (South) open economy? What are the ef- fects of introducing IPR into a north–south endogenous growth model? These questions are in line with our research aims for this paper, as will be made clear below. Several papers have used a north–south endogenous growth set up to deal with the above mentioned questions, specifically in terms of what is the optimal enforcement of IPR protection. Sá et al. (2009), for example, discuss this topic in relation to a small and developing open economy, analyzing whether there should be no enforcement on the one hand or complete enforcement on the other. Their results point to the dominance of a positive relationship between IPR enforcement and welfare, albeit showing that, when departing from weak protection choices, some exceptions may be found. Wu (2010) observes that there is no consensus in the literature on the relationship between IPR protec- tion and economic growth, since this relationship relies on the develop- ment level of the country, which imposes different necessities of innovation and imitation that affect the impact of IPR protection. Mondal and Gupta (2009) also propose an endogenous growth model that analyses the effects of IPR protection on economic growth, conclud- ing that a strategy of strengthening IPR in the South may lead to welfare gains in both the North and the South (although the marginal welfare gain is higher in the former than in the latter), which leads to a rise in the Northern innovation rate and a decrease in both the Southern rate of imitation and the south–north wage in the new steady state equilib- rium. Thus, this strategy has a positive effect on the steady state equilib- rium growth rate in both countries. Economic Modelling 38 (2014) 112–120 ⁎ Corresponding author. E-mail address: oafonso@fep.up.pt (Ó. Afonso). 1 The author acknowledges financial support from a PhD scholarship provided by FCT (Fundação para a Ciência e Tecnologia) and co-financing by FSE (Fundo Social Europeu). 0264-9993/$ – see front matter © 2013 Elsevier B.V. All rights reserved. http://dx.doi.org/10.1016/j.econmod.2013.12.021 Contents lists available at ScienceDirect Economic Modelling journal homepage: www.elsevier.com/locate/ecmod