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R&D Subsidies and Foreign Direct Investment

Author

Listed:
  • Manuel A. Gómez

    (Universidade da Coruña, Campus de A Coruña)

  • Tiago Neves Sequeira

    (Universidade da Beira Interior, Estrada do Sineiro)

Abstract

We devise a model in which domestic firms do applied R&D, which can be subsidized by the government, and foreign firms with superior technology can enter in the domestic market. Foreign Direct Investment can act as a substitute of subsidies to improve domestic R&D, the share of domestic leading firms and consumption. Relatively closed economies may benefit from R&D subsidization while relatively open economies may not. For relatively low growth of the technological frontier, it is optimal to subsidize R&D and close the economy to foreign investment but the opposite happens for relatively high growth. Numerical simulations show the economy dynamics after policy experiments.

Suggested Citation

  • Manuel A. Gómez & Tiago Neves Sequeira, 2016. "R&D Subsidies and Foreign Direct Investment," Open Economies Review, Springer, vol. 27(4), pages 769-793, September.
    • Handle: RePEc:kap:openec:v:27:y:2016:i:4:d:10.1007_s11079-016-9390-3
    DOI: 10.1007/s11079-016-9390-3
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    Keywords

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    JEL classification:

    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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