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Strategic Investment and the Gains from Trade

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Author Info

  • Gerda Dewit

    ()
    (Department of Economics Finance and Accounting, National University of Ireland, Maynooth)

  • Dermot Leahy

    ()
    (Department of Economics Finance and Accounting, National University of Ireland, Maynooth)

Abstract

This paper examines how trade liberalisation affects innovation, profits and welfare when firms are engaging in strategic R&D investment. We show that there are multiple equilibria including an autarky equilibrium for a range of high but non-prohibitive trade costs. At lower trade costs, only the trading equilibrium survives. Welfare is U-shaped in the trade costs, so a small fall in trade costs can be welfare reducing. However we find a threshold level of the effectiveness of investment above which trade is always welfare superior to autarky

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File URL: http://economics.nuim.ie/sites/economics.nuim.ie/files/working-papers/N216-11.pdf
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Bibliographic Info

Paper provided by Department of Economics, Finance and Accounting, National University of Ireland - Maynooth in its series Economics, Finance and Accounting Department Working Paper Series with number n216-11.pdf.

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Length: 23 pages
Date of creation: 2011
Date of revision:
Handle: RePEc:may:mayecw:n216-11.pdf

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Postal: Maynooth, Co. Kildare
Phone: 353-1-7083728
Fax: 353-1-7083934
Web page: http://economics.nuim.ie
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Related research

Keywords: Reciprocal Markets; Strategic R&D Investment; Trade Costs; Trade Liberalisation; Effectiveness of R&D.;

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References

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  1. Ngo Van Long & Horst Raff & Frank Stähler, 2008. "Innovation and Trade with Heterogeneous Firms," Kiel Working Papers 1430, Kiel Institute for the World Economy.
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Cited by:
  1. Takauchi, Kazuhiro, 2012. "International R&D Rivalry with a Shipping Firm," MPRA Paper 36843, University Library of Munich, Germany.

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