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Protectionism under R&D policy: innovation rate and welfare

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Author Info

  • Felipa de Mello-Sampayo
  • Sofia de Sousa-Vale
  • Francisco Camões
  • Orlando Gomes

Abstract

Purpose – The purpose of this paper is to explain how eventual pressures from national lobbies may lead governments to shift from an optimal into a non-optimal innovation policy. Design/methodology/approach – A theoretical model is developed in order to examine and explain the growth and welfare effects of optimal and non-optimal innovation policies. The non-optimal policy corresponds to a subsidy for national innovators that is equivalent to an optimal policy of incentives (tax cuts) to foreign investors. Since we are assessing what can nationals do with the support that could be oriented to foreign firms, we are measuring what the economy loses for not supporting foreign firms. Findings – The authors find welfare loss when supporting national R&D instead of foreign R&D and conclude that the same support given to innovation can produce strikingly different outcomes depending on who receives the support. Practical implications – The analysis allows the impact of the inefficiency caused by policies that are not sound, from a strictly economic point of view, to be measured. Originality/value – The originality of the paper is related to the assessment of the implications and to the measurement of the effects of non-optimal R&D policies.

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Bibliographic Info

Article provided by Emerald Group Publishing in its journal Journal of Economic Studies.

Volume (Year): 39 (2012)
Issue (Month): 1 (January)
Pages: 106-124

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Handle: RePEc:eme:jespps:v:39:y:2012:i:1:p:106-124

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Related research

Keywords: Endogenous growth; Fiscal policy; Foreign direct investment; Government policy; Innovation; International investments; Poland; Portugal; Protectionism; Research and development; Subsidies; Taxes;

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References

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  1. Eduardo Borensztein & Jose De Gregorio & Jong-Wha Lee, 1995. "How Does Foreign Direct Investment Affect Economic Growth?," NBER Working Papers 5057, National Bureau of Economic Research, Inc.
  2. Feenstra, Robert C., 1996. "Trade and uneven growth," Journal of Development Economics, Elsevier, vol. 49(1), pages 229-256, April.
  3. Elberfeld Walter & Götz Georg & Stähler Frank, 2005. "Vertical Foreign Direct Investment, Welfare, and Employment," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 5(1), pages 1-30, February.
  4. Giordani, Paolo E. & Zamparelli, Luca, 2007. "The Importance of Industrial Policy in Quality-Ladder Growth Models," MPRA Paper 6142, University Library of Munich, Germany.
  5. Reis, Ana Balcao, 2006. "Welfare, taxes and foreign investment," Journal of Economic Dynamics and Control, Elsevier, vol. 30(6), pages 1045-1061, June.
  6. Felipa de Mello-Sampayo & Sofia de Sousa-Vale & Francisco Camões, 2007. "Accelerating Innovation: National R&D Subsidies versus Foreign R&D Tax Credits," Working Papers Series 1 ercwp0108, ISCTE-IUL, Business Research Unit (BRU-IUL).
  7. Mariam Khawar, 2003. "Productivity and foreign direct investment – evidence from Mexico," Journal of Economic Studies, Emerald Group Publishing, vol. 30(1), pages 66-76, January.
  8. V N Balasubramanyam & M Salisu & David Sapsford., . "Foreign Direct Investment and Growth in EP and IS Countries," Working Papers ec18/94, Department of Economics, University of Lancaster.
  9. Xulia Gonz�lez & Jordi Jaumandreu & Consuelo Pazo, 2005. "Barriers to Innovation and Subsidy Effectiveness," RAND Journal of Economics, The RAND Corporation, vol. 36(4), pages 930-949, Winter.
  10. Balcao Reis, Ana, 2001. "On the welfare effects of foreign investment," Journal of International Economics, Elsevier, vol. 54(2), pages 411-427, August.
  11. Christos Pitelis, 1994. "Industrial Strategy: For Britain, in Europe and the World," Journal of Economic Studies, Emerald Group Publishing, vol. 21(5), pages 3-92, October.
  12. Nicholas Bull, 1993. "When all the optimal dynamic taxes are zero," Working Paper Series / Economic Activity Section 137, Board of Governors of the Federal Reserve System (U.S.).
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