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Abstract

We set up a simple trade model with two countries hosting one firm each. The firms invest in cost-reducing R&D, and each government may grant R&D subsidies to the domestic firm. We show that it is optimal for a government to provide higher R&D subsidies the lower the level of trade costs, even if the firms are independent monopolies. If firms produce imperfect substitutes, policy competition may become so fierce that only one of the firms survives. International policy harmonization eliminates policy competition and ensures a symmetric outcome. However, it is shown that harmonization is not necessarily welfare-maximizing. The optimal coordinated policies may imply an asymmetric outcome with R&D subsidies to only one of the firms.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 74 (2008)
Issue (Month): 1 (January)
Pages: 170-187

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Handle: RePEc:eee:inecon:v:74:y:2008:i:1:p:170-187

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Web page: http://www.elsevier.com/locate/inca/505552

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Find related papers by JEL classification:

• F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies
• F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
• F15 - International Economics - - Trade - - - Economic Integration

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Cited by:

1. Stähler, Frank & Raff, Horst & Long, Ngo Van, 2007. "The Effects of Trade Liberalization on Productivity and Welfare: The Role of Firm Heterogeneity, R&D and Market Structure," Economics Working Papers 2007,20, Christian-Albrechts-University of Kiel, Department of Economics.
   
   • Ngo Van Long & Horst Raff & Frank Staehler, 2007. "The Effects of Trade Liberalization on Productivity and Welfare: The Role of Firm Heterogeneity, R&D and Market Structure," Working Papers 0710, University of Otago, Department of Economics, revised Jun 2007.
2. Leahy, Dermot & Neary, J Peter, 2010. "Oligopoly and Trade," CEPR Discussion Papers 8172, C.E.P.R. Discussion Papers.
   
   • Peter Neary & Dermot Leahy, 2010. "Oligopoly and Trade," Economics Series Working Papers 517, University of Oxford, Department of Economics.
   • Dermot Leahy & J. Peter Neary, 2010. "Oligopoly And Trade," Economics, Finance and Accounting Department Working Paper Series n215-10.pdf, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth.
3. Giammario Impullitti, 2007. "International Schumpeterian Competition and Optimal R&D subsidies," Economics Working Papers ECO2007/55, European University Institute.
4. Ngo Van Long & Horst Raff & Frank Stähler, 2009. "Innovation and Trade with Heterogeneous Firms," CESifo Working Paper Series 2796, CESifo Group Munich.
   
   • Long, Ngo Van & Raff, Horst & Stähler, Frank, 2011. "Innovation and trade with heterogeneous firms," Journal of International Economics, Elsevier, vol. 84(2), pages 149-159, July.
   • Ngo Van Long & Horst Raff & Frank Stähler, 2008. "Innovation and Trade with Heterogeneous Firms," Kiel Working Papers 1430, Kiel Institute for the World Economy.
5. Sebastian Braun, 2006. "Trade Liberalisation, Process and Product Innovation, and Relative Skill Demand," JEPS Working Papers 06-004, JEPS.
   
   • Sebastian Braun, 2007. "Trade Liberalisation, Process and Product Innovation, and Relative Skill Demand," SFB 649 Discussion Papers SFB649DP2007-001, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
6. Takauchi, Kazuhiro, 2012. "International R&D Rivalry with a Shipping Firm," MPRA Paper 36843, University Library of Munich, Germany.
7. Pehr-Johan Norbäck, 2011. "Subsidizing Away Exports? A Note on R&D-policy Towards Multinational Firms," Journal of Industry, Competition and Trade, Springer, vol. 11(1), pages 25-42, March.
   
   • Norbäck, Pehr-Johan, 2010. "Subsidizing Away Exports? A Note on R&D-policy towards Multinational Firms," Working Paper Series 832, Research Institute of Industrial Economics.
8. Peter Neary & Dermot Leahy, 2007. "Multilateral Subsidy Games," Economics Series Working Papers 346, University of Oxford, Department of Economics.
   
   • Dermot Leahy & J. Neary, 2009. "Multilateral subsidy games," Economic Theory, Springer, vol. 41(1), pages 41-66, October.
   • Leahy, Dermot & Neary, J Peter, 2007. "Multilateral Subsidy Games," CEPR Discussion Papers 6479, C.E.P.R. Discussion Papers.
9. Douhan, Robin & Norbäck, Pehr-Johan & Persson, Lars, 2009. "Entrepreneurial Innovations, Entrepreneurship Policy and Globalization," Working Paper Series 807, Research Institute of Industrial Economics.
   
   • Douhan, Robin & Norbäck, Pehr-Johan & Persson, Lars, 2010. "Entrepreneurial Innovations, Entrepreneurship Policy and Globalization," CEPR Discussion Papers 7752, C.E.P.R. Discussion Papers.

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