IDEAS home Printed from
   My bibliography  Save this article

The effect of subsidy policies on the product quality improvement


  • Shin, Inyong
  • Kim, Hyunho


This paper analyzes the effect of government subsidy policies on creating an incentive for domestic firms to improve their product quality before exporting to an outside market. The goal of the government is to minimize the time it takes to reach the appropriate product quality level at low costs. We simulate a dynamic profit maximization problem of the firm and derive the optimal path of the product quality development, then test the efficiency of the three types of subsidy methods: Constant Subsidy, Quality Matching Subsidy and Time-limited Subsidy methods. Our model yields a number of intriguing results: (i) not every subsidy methods guarantee product quality development, although the same amount is subsidized. (ii) the matching fund style subsidy is more efficient than providing constant amount of subsidy. (iii) Time-limited Subsidy improves product quality faster than the unlimited subsidy method. (iv) Time-limited Subsidy improves quality much faster than other methods with less subsidy cost. (v) there is an optimal combination between the subsidy and the time limits.

Suggested Citation

  • Shin, Inyong & Kim, Hyunho, 2010. "The effect of subsidy policies on the product quality improvement," Economic Modelling, Elsevier, vol. 27(3), pages 687-696, May.
  • Handle: RePEc:eee:ecmode:v:27:y:2010:i:3:p:687-696

    Download full text from publisher

    File URL:
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    1. Miyagiwa, Kaz & Ohno, Yuka, 1995. "Closing the Technology Gap under Protection," American Economic Review, American Economic Association, vol. 85(4), pages 755-770, September.
    2. Criscuolo, Chiara & Haskel, Jonathan E. & Slaughter, Matthew J., 2010. "Global engagement and the innovation activities of firms," International Journal of Industrial Organization, Elsevier, vol. 28(2), pages 191-202, March.
    3. James A. Brander & Barbara J. Spencer, 1981. "Tariffs and the Extraction of Foreign Monopoly Rents under Potential Entry," Canadian Journal of Economics, Canadian Economics Association, vol. 14(3), pages 371-389, August.
    4. Bagwell, Kyle, 1991. "Optimal Export Policy for a New-Product Monopoly," American Economic Review, American Economic Association, vol. 81(5), pages 1156-1169, December.
    5. Barbara J. Spencer & James A. Brander, 1983. "International R & D Rivalry and Industrial Strategy," Review of Economic Studies, Oxford University Press, vol. 50(4), pages 707-722.
    6. Kenneth Arrow, 1962. "Economic Welfare and the Allocation of Resources for Invention," NBER Chapters,in: The Rate and Direction of Inventive Activity: Economic and Social Factors, pages 609-626 National Bureau of Economic Research, Inc.
    7. Wagner, Joachim, 2006. "International Firm Activities and Innovation: Evidence from Knowledge Production Functions for German Firms," HWWA Discussion Papers 344, Hamburg Institute of International Economics (HWWA).
    8. Braga, Helson & Willmore, Larry, 1991. "Technological Imports and Technological Effort: An Analysis of Their Determinants in Brazilian Firms," Journal of Industrial Economics, Wiley Blackwell, vol. 39(4), pages 421-432, June.
    9. Knut Blind & Andre Jungmittag, 2004. "Foreign Direct Investment, Imports and Innovations in the Service Industry," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 25(2), pages 205-227, June.
    10. Bagwell, Kyle & Staiger, Robert W., 1989. "The role of export subsidies when product quality is unknown," Journal of International Economics, Elsevier, vol. 27(1-2), pages 69-89, August.
    11. Arvind Panagariya, 1999. "Trade Policy in South Asia: Recent Liberalisation and Future Agenda," The World Economy, Wiley Blackwell, vol. 22(3), pages 353-378, May.
    12. Bruno Cassiman & Reinhilde Veugelers, 2002. "R&D Cooperation and Spillovers: Some Empirical Evidence from Belgium," American Economic Review, American Economic Association, vol. 92(4), pages 1169-1184, September.
    13. Shy, Oz, 2000. "Exporting as a Signal for Product Quality," Economica, London School of Economics and Political Science, vol. 67(265), pages 79-90, February.
    14. Brander, James A. & Spencer, Barbara J., 1985. "Export subsidies and international market share rivalry," Journal of International Economics, Elsevier, vol. 18(1-2), pages 83-100, February.
    15. Bhagwati, Jagdish N, 1988. "Export-Promoting Trade Strategy: Issues and Evidence," World Bank Research Observer, World Bank Group, vol. 3(1), pages 27-57, January.
    16. Roberto Alvarez & Raymond Robertson, 2004. "Exposure to foreign markets and plant-level innovation: evidence from Chile and Mexico," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 13(1), pages 57-87.
    Full references (including those not matched with items on IDEAS)


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Ram Kumar Phuyal, 2016. "Imposition of R&D Subsidy in a Product Differentiated Duopolistic Industry," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 6(6), pages 336-351, June.
    2. Yan, Xinghao & Zaric, Gregory S., 2016. "Families of supply chain coordinating contracts in the presence of retailer effort," International Journal of Production Economics, Elsevier, vol. 175(C), pages 213-225.
    3. Ayob, Abu H. & Freixanet, Joan, 2014. "Insights into public export promotion programs in an emerging economy: The case of Malaysian SMEs," Evaluation and Program Planning, Elsevier, vol. 46(C), pages 38-46.


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:ecmode:v:27:y:2010:i:3:p:687-696. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.