Government R&D Subsidies and International Competitiveness of Labor-managed Firms

The literature postulates that government subsidization of strategic R&D activities of profit maximising firms (PMFs) increases their shares in international markets. Will this also hold for labor-managed firms (LMFs) which are owned by employees and aim to maximize the profit per labor? This paper provides a theoretical model that examines how such governmental interventions can help LMFs in their home countries to compete better with PMFs in international markets. Our model shows that in most, but not all cases, investing more in R&D activities benefits LMFs by increasing their shares in international markets and decreasing the market share of their competitors. The optimal government R&D subsidy or tax for LMFs depends on the R&D elasticity of LMFs as well as how their competitors react to R&D investment. In contrast, the optimal government R&D subsidy for PMFs depends solely on the slope of the R&D reaction curve of PMFs competitors. Our results present useful policy implications for those governments that seek ways to support LMFs - or more broadly cooperatives - to attain more sustained growth given their advantages over PMFs in the context of sustainable development.