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Cross-Country Economic Espionage and Investment in Research and Development

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  • Po-Lu Chen

Abstract

This paper investigates the impact of cross-country economic espionage on innovation incentives and welfare by considering both ex ante and ex post effects of espionage. I consider two firms residing in two countries with two types of innovation, cost-reducing research and development (R&D) and information technology R&D, and find that espionage activity reduces both firms¡¯ investment in cost-reducing R&D. The change in consumer¡¯s welfare due to espionage depends on two offsetting effects and is ambiguous. I also discuss the effect of sales ban policy on deterring espionage. I find that sales ban policy may alternatively encourage investment in espionage activities if market size is small. Whether sales ban policy can improve consumer¡¯s welfare depends on the market size. When market size is large that espionage activities are deterred by sales ban, then more capital devoted to cost-reducing R&D leads to higher consumer welfare. However, if market size is small that espionage is not deterred, then monopolistic position of the local firm under sales ban policy hurts local consumers.

Suggested Citation

  • Po-Lu Chen, 2016. "Cross-Country Economic Espionage and Investment in Research and Development," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 8(4), pages 146-155, April.
    • Handle: RePEc:ibn:ijefaa:v:8:y:2016:i:4:p:146-155
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    References listed on IDEAS

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    Cited by:

    1. Stupak, O., 2023. "Industrial cyberespionage in research and development races," Cambridge Working Papers in Economics 2337, Faculty of Economics, University of Cambridge.
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    More about this item

    Keywords

    espionage; research and development; R&D; sales ban; information technology; internet hacking;
    All these keywords.

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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