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International Competition and U.S. R&D Subsidies: A Quantitative Welfare Analysis

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  • Giammario Impullitti

Abstract

The geographical distribution of R&D investment changes dramatically in the 1970s and 1980s. In the early 1970s U.S. firms are the uncontested world leaders in R&D investment in most manufacturing sectors. Later, led by Japan and Europe, foreign firms start challenging American R&D leadership in many sectors of the economy. In this period of increasing competition we also observe a substantial increase in the U.S. R&D subsidy. In a version of the multi-country quality ladder growth model I study the effects of foreign R&D competition on domestic welfare and on the optimal R&D subsidy. I build a new empirical index of international R&D rivalry that can be used to perform quantitative analysis in this type of frameworks. In a calibrated version of the model I focus on the period 1979-1991 and perform the following quantitative exercises: first, I evaluate the quantitative effects of the observed increase in foreign R&D competition on U.S. welfare. I find that the positive growth effect and the negative business-stealing effect of foreign competition on U.S. welfare substantially balance each other, and the overall welfare effect of competition is negligible - less then 1 percent of per-capita consumption. Moreover, using estimates of the effective U.S. R&D subsidy rate, I compute the distance from optimality of the observed subsidy at each level of competition. I find that international competition increases the optimal subsidy and that, surprisingly, the U.S. subsidy observed in the data is fairly close to the optimal subsidy.

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Paper provided by FEDEA in its series Economic Reports with number 15-08.

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Date of creation: Jun 2008
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Handle: RePEc:fda:fdacee:15-08

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Cited by:
  1. Ufuk Akcigit & Douglas Hanley & Nicolas Serrano-Velarde, 2013. "Back to Basics: Basic Research Spillovers, Innovation Policy and Growth," PIER Working Paper Archive, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania 13-051, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  2. Nicolas Serrano-Velarde & Douglas Hanley & Ufuk Akcigit, 2012. "Back to Basics: Basic Research Spillovers, Innovation Policy and Growth," 2012 Meeting Papers, Society for Economic Dynamics 665, Society for Economic Dynamics.
  3. Afonso, Oscar, 2012. "The impact of public goods and services and public R&D on the non-observed economy size, wages inequality and growth," Economic Modelling, Elsevier, Elsevier, vol. 29(5), pages 1996-2004.
  4. Daniele Tavani & Luca Zamparelli, 2013. "Endogenous Technical Change, Employment and Distribution in the Goodwin Model," IMK Working Paper, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute 127-2013, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
  5. Giammario Impullitti, 2007. "International Schumpeterian Competition and Optimal R&D subsidies," Economics Working Papers, European University Institute ECO2007/55, European University Institute.
  6. Michael D. Koenig & Xiaodong Liu & Yves Zenou, 2014. "R&D Networks: Theory, Empirics and Policy Implications," Discussion Papers, Stanford Institute for Economic Policy Research 13-027, Stanford Institute for Economic Policy Research.
  7. Guido Cozzi & Giammario Impullitti, 2008. "Government spending composition, technical change and wage inequality," Working Papers, Business School - Economics, University of Glasgow 2009_02, Business School - Economics, University of Glasgow.
  8. Suen, Richard M.H., 2013. "Research Policy and U.S. Economic Growth," MPRA Paper 49103, University Library of Munich, Germany.
  9. A. Minniti & F. Venturini, 2014. "R&D Policy and Schumpeterian Growth: Theory and Evidence," Working Papers, Dipartimento Scienze Economiche, Universita' di Bologna wp945, Dipartimento Scienze Economiche, Universita' di Bologna.
  10. Wolf-Heimo Grieben & Fuat Sener, 2009. "Labor Unions, Globalization, and Mercantilism," CESifo Working Paper Series, CESifo Group Munich 2889, CESifo Group Munich.

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