A growth model with externalities across foreign and domestic firms

This paper presents a theoretical model which takes into account technological interdependence among economies and examines the impact of location effects in explaining growth. In a small open economy, final goods production combines the production processes of multinational enterprises (MNEs) and non MNEs firms, which compete for labor and capital inputs. Technological interdependence is assumed to work through spatial externalities across countries and vertical/horizontal spillovers from linkages between foreign and domestic firms. This augmented growth model yields a conditional convergence equation which is characterized by parameter heterogeneity across countries and spatial dependence.