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Innovation Through Protection: Does Safeguard Protection Increase Investment in R and D?

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  • Benjamin H. Liebman
  • Kara M. Reynolds

Abstract

We perform the first empirical study to focus on the relationship between trade protection and investment in Research and Development. Our results support predictions from the theoretical literature that temporary tariffs stimulate research and development, although we find no evidence that this effect diminishes as the termination of protection approaches as predicted by some theoretical models. We also find little evidence that quotas reduce research and development as predicted by multiple theoretical works. Finally, our results indicate that temporary tariffs result in decreased capital investment, perhaps because firms use periods of temporary protection to shutdown unprofitable facilities. This reveals an important distinction in firm behavior with regard to investment in tangible versus intangible capital during periods of trade protection.

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File URL: http://www.american.edu/cas/economics/pdf/upload/2009-18.pdf
File Function: First version, 2009
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Bibliographic Info

Paper provided by American University, Department of Economics in its series Working Papers with number 2009-18.

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Date of creation: Sep 2009
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Handle: RePEc:amu:wpaper:2009-18

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Web page: http://www.american.edu/cas/economics/

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Keywords: Research and Development; Strategic Protection;

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  1. Richard Blundell & Steve Bond, 1995. "Initial conditions and moment restrictions in dynamic panel data models," IFS Working Papers W95/17, Institute for Fiscal Studies.
  2. Stephen Bond & Dietmar Harhoff & John Van Reenen, 2003. "Investment, R&D and Financial Constraints in Britain and Germany," CEP Discussion Papers dp0595, Centre for Economic Performance, LSE.
  3. n/a, 1998. "Can real equilibrium models account for the fluctuations of the UK business cycle?," NIESR Discussion Papers 211, National Institute of Economic and Social Research.
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  5. Joachim Zietz & Bichaka Fayissa, 1992. "R & D expenditures and import competition: Some evidence for the U.S," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 128(1), pages 52-66, March.
  6. Lenway, Stefanie & Morck, Randall & Yeung, Bernard, 1996. "Rent Seeking, Protectionism and Innovation in the American Steel Industry," Economic Journal, Royal Economic Society, vol. 106(435), pages 410-21, March.
  7. Bronwyn H. Hall & John van Reenen, 1999. "How Effective are Fiscal Incentives for R&D? A New Review of the Evidence," NBER Working Papers 7098, National Bureau of Economic Research, Inc.
  8. Bester, H. & Petrakis, E., 1991. "The Incentives for Cost Reduction in a Differentiated Industry," Discussion Paper 1991-36, Tilburg University, Center for Economic Research.
  9. Blundell, Richard & Bond, Stephen & Devereux, Michael & Schiantarelli, Fabio, 1992. "Investment and Tobin's Q: Evidence from company panel data," Journal of Econometrics, Elsevier, vol. 51(1-2), pages 233-257.
  10. Aaron Tornell, 1997. "Rational Atrophy: The U.S. Steel Industry," Harvard Institute of Economic Research Working Papers 1806, Harvard - Institute of Economic Research.
  11. Mark Funk, 2003. "The Effects of Trade on Research and Development," Open Economies Review, Springer, vol. 14(1), pages 29-42, January.
  12. Corinne BARLET & Emmanuel DUGUET & David ENCAOUA & Jacqueline PRADEL, 1998. "The Commercial Success of Innovations: an Econometric Analysis at the Firm Lebel in French Manufacturing," Annales d'Economie et de Statistique, ENSAE, issue 49-50, pages 457-478.
  13. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
  14. Hartigan, James C & Perry, Philip R & Kamma, Sreenivas, 1986. "The Value of Administered Protection: A Capital Market Approach," The Review of Economics and Statistics, MIT Press, vol. 68(4), pages 610-17, November.
  15. Miyagiwa, Kaz & Ohno, Yuka, 1999. "Credibility of Protection and Incentives to Innovate," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(1), pages 143-63, February.
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