China Center for Economic Research Working Paper NO. E2007003 July 2007
In this paper, we develop an endogenous growth model that combines structural change with repeated product improvements. There are two sectors in the present paper, one is traditional sector, and the other is modern sector. The technological progress in the traditional sector takes the form of horizontal innovation based on expanding variety, while the technologies in the modern sector become not only increasingly capital-intensive but also progressively productive over time. The application of the basic model to the less developed economies show that the optimal industrial structure in the less developed countries (LDCs) is endogenously determined by its factor endowments; the firm in the LDCs that enters the capital-intensive, advanced industry in the developed countries (DCs) would be nonviable owing to the relative scarcity of capital in the LDCs factor endowments; whether the industrial structure matches with the factor endowment structure or not is the fundamental cause to explain differences in economic performance among the LDCs.