IDEAS home Printed from https://ideas.repec.org/a/taf/ecinnt/v12y2003i5p465-480.html
   My bibliography  Save this article

The effect of subsidies to product innovation on international competition

Author

Listed:
  • Inigo Herguera
  • Stefan Lutz

Abstract

Models of vertical product differentiation allow for the analysis of international trade in the presence of country asymmetries in terms of product qualities, technology, costs, market size, and income. In the presence of such asymmetries, national industries will either be market leaders or be lagging behind in the international market place in terms of their product qualities. The resulting asymmetry in profits creates powerful incentives for lagging industries as well as their national governments to reverse this situation to their advantage, i.e. to induce "leapfrogging" in terms of product qualities. This paper presents an analysis of subsidies to investment in product quality as a facilitating device for leapfrogging. Investment in product quality is interpreted as innovation investment or expense, which includes but is not limited to R&D investment. Its result is a better, different product, i.e. product innovation. It is found that subsidies to quality investment can induce leapfrogging and thereby increase domestic profits, consumer surplus and welfare. In the case of leapfrogging, the domestic firm will enjoy profit increases that are larger than the necessary subsidy costs. The strategic aspect of the subsidy policy lies in its function as a facilitating device for a radical change of the initial market structure, where the domestic firm gains an international leadership position.

Suggested Citation

  • Inigo Herguera & Stefan Lutz, 2003. "The effect of subsidies to product innovation on international competition," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 12(5), pages 465-480.
  • Handle: RePEc:taf:ecinnt:v:12:y:2003:i:5:p:465-480
    DOI: 10.1080/1043859031000078461
    as

    Download full text from publisher

    File URL: http://www.tandfonline.com/doi/abs/10.1080/1043859031000078461
    Download Restriction: Access to full text is restricted to subscribers.
    ---><---

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

    Citations

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


    Cited by:

    1. Richard T. Gretz & Jannett Highfill & Robert C. Scott, 2009. "Strategic Research And Development Policy: Societal Objectives And The Corporate Welfare Argument," Contemporary Economic Policy, Western Economic Association International, vol. 27(1), pages 28-45, January.
    2. Rosanna Pittiglio & Edgardo Sica & Stefania Villa, 2009. "Innovation and internationalization: the case of Italy," The Journal of Technology Transfer, Springer, vol. 34(6), pages 588-602, December.
    3. repec:kap:iaecre:v:16:y:2010:i:3:p:243-256 is not listed on IDEAS
    4. Jannett Highfill & Michael McAsey, 2010. "Firm Metrics with Continuous R&D, Quality Improvement, and Cournot Quantities," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 16(3), pages 243-256, August.

    Corrections

    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:taf:ecinnt:v:12:y:2003:i:5:p:465-480. 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: . General contact details of provider: http://www.tandfonline.com/GEIN20 .

    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.

    We have no bibliographic references for this item. You can help adding them by using 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.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Longhurst (email available below). General contact details of provider: http://www.tandfonline.com/GEIN20 .

    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.