Externalities and Growth

"If ideas are the engine of growth and if an excess of social over private returns is an essential feature of the production of ideas, then we want to go out of our way to introduce external effects into growth theory, not try to do without them"- Lucas

Interesting working paper;
Externalities and Growth, Handbook of Economic Growth,
Peter J. Klenow and Andrés Rodríguez-Clare1

Externalities play a central role in most theories of economic growth. We argue that international externalities, in particular, are essential for explaining a number of empirical regularities about growth and development. Foremost among these is that many countries appear to share a common long run growth rate despite persistently different rates of investment in physical capital, human capital, and research. With this motivation, we construct a hybrid of some prominent growth models that have international knowledge externalities. When calibrated, the hybrid model does a surprisingly good job of generating realistic dispersion of income levels with modest barriers to technology adoption. Human capital and physical capital contribute to income differences both directly (as usual), and indirectly by boosting resources devoted to technology adoption. The model implies that most of income above subsistence is made possible by international diffusion of knowledge.

Countries with high R&D spending relative to GDP do not grow systematically faster