We introduce firm and worker heterogeneity into a model of innovation‐driven endogenous growth. Individuals who differ in ability sort into either a research sector or a manufacturing sector that produces differentiated goods. Each research project generates a new variety of the differentiated product and a random technology for producing it. Technologies differ in complexity and productivity, and technological sophistication is complementary to 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 and conditions in one country to outcomes in others.