J Econ (2015) 116:183–209 DOI 10.1007/s00712-014-0430-4 A symmetric Heckscher–Ohlin model of endogenous growth Basant K. Kapur Received: 23 April 2013 / Accepted: 3 December 2014 / Published online: 3 January 2015 © Springer-Verlag Wien 2014 Abstract We study the interaction between production and R&D patterns in a 2×2×2 open-economies model of endogenous growth. Unlike existing studies, we treat the two industries entirely symmetrically—both are imperfectly competitive, and engage in sector-specific expanding-product-variety or quality-ladder innovation activities. To achieve a more satisfactory analytical characterization, we eliminate scale effects and impose strict concavity rather than linearity on the contribution of skilled labour to industry R&D. With imperfect international knowledge spillovers, an increase in one country’s skilled-labour endowment above the other’s affects production and R&D activities in both countries, with the resulting increased production and research spe- cialization across countries raising world innovation rates in both industries. Sur- prisingly, increasing one country’s skilled-labour endowment towards the other’s can reduce world innovation rates in both industries, on account of the resulting reduced specialization. Broader implications of the analysis are also discussed. Keywords Innovation · North–North trade · Endogenous growth · Heckscher–Ohlin · Expanding product variety · Quality ladders JEL Classification F1 · F4 · O3 1 Introduction Various extensions of endogenous growth theory to the case of open economies have been undertaken in the past two decades, including attempts to integrate it with a Heckscher–Ohlin (H –O)2 × 2 × 2 structure (two countries, trading two final products, B. K. Kapur (B ) Department of Economics, National University of Singapore, Kent Ridge, Singapore 117570, Singapore e-mail: ecskapur@nus.edu.sg 123