Welfare-enhancing export subsidies and agglomeration

This paper analyzes the impact of an increase in multilateral export subsidies on world growth through the aggregation of firms, with consideration of local knowledge spillovers in research and development (R&D). The model places particular emphasis on two aspects: transportation costs and the international relocation of firms. The model demonstrates that when multilateral export subsidies for differentiated goods are increased simultaneously, under certain parameter conditions, the world growth rate rises due to further agglomeration in the agglomeration country. This is due to the fact that the rise in world demand for differentiated products resulting from the increase in export subsidies for such products prompts firms to shift their locations from the non-agglomeration country, where capital stocks are relatively scarce and demand for differentiated products is relatively small, to the agglomeration country, where capital stocks are abundant and demand for differentiated products is relatively large, with the aim of reducing transportation costs. This relocation of firms to the agglomeration country then reduces R&D costs through the knowledge spillover effect in the agglomeration country, which in turn leads to further promotion of R&D in the agglomeration country, resulting in an increase in the world growth rate. Moreover, this paper illustrates that when both population size and R&D productivity are sufficiently elevated, multilateral export subsidies for differentiated goods firms enhance economic welfare not only in the agglomeration country but also in the non-agglomeration country.