We introduce firm and worker heterogeneity into a model of innovation‐driven endogenous growth. Individuals who differ in ability sort into either a research activity or a manufacturing sector. Research projects generate new varieties of a differentiated product. Projects differ in quality and the resulting technologies differ in productivity. In both sectors, there is a complementarity between firm quality and worker ability. We study the co‐determination of growth and income inequality in both the closed and open economy, as well as the spillover effects of policy in one country to outcomes in others.