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Cost effectiveness of R&D and strategic trade policy

Author

Listed:
  • Praveen Kujal

    () (Universidad Carlos III de Madrid)

  • Juan Ruiz

    () (Banco de España)

Abstract

This paper analyzes the incentives for governments to impose export subsidies when firms invest in a cost saving technology before market competition. Governments first impose an export subsidy or a tax. After observing export policy, firms invest in cost reducing R&D and subsequently compete in the market. Governments subsidize exports under Cournot competition. Under Bertrand competition, export subsidies are positive whenever R&D is sufficiently cost-effective at reducing marginal costs, and negative otherwise. The trade policy reversal found in models without endogenous sunk costs disappears if R&D is sufficiently cost-effective. Thus, output subsidies seem more robust than implied by the recent literature.

Suggested Citation

  • Praveen Kujal & Juan Ruiz, 2007. "Cost effectiveness of R&D and strategic trade policy," Working Papers 0701, Banco de España;Working Papers Homepage.
  • Handle: RePEc:bde:wpaper:0701
    as

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    References listed on IDEAS

    as
    1. Galindo, Arturo & Izquierdo, Alejandro & Montero, Jose Manuel, 2007. "Real exchange rates, dollarization and industrial employment in Latin America," Emerging Markets Review, Elsevier, vol. 8(4), pages 284-298, December.
    2. Kujal Praveen & Ruiz Juan M., 2007. "Cost Effectiveness of R&D and Strategic Trade Policy," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 7(1), pages 1-35, April.
    3. Juan F. Jimeno & Esther Moral & Lorena Saiz, 2006. "Structural breaks in labor productivity growth: the United States vs. the European Union," Working Papers 0625, Banco de España;Working Papers Homepage.
    4. K. C. Fung & Alicia Garcia-Herrero & Hitomi Iizaka & Alan Siu, 2005. "Hard Or Soft? Institutional Reforms And Infrastructure Spending As Determinants Of Foreign Direct Investment In China," The Japanese Economic Review, Japanese Economic Association, vol. 56(4), pages 408-416.
    5. Josep M. Vilarrubia, 2006. "Neighborhood effects in economic growth," Working Papers 0627, Banco de España;Working Papers Homepage.
    6. Ricardo Gimeno & Juan M. Nave, 2006. "Genetic algorithm estimation of interest rate term structure," Working Papers 0634, Banco de España;Working Papers Homepage.
    7. Enrique Alberola & Rodrigo César Salvado, 2006. "Banks, remittances and financial deepening in receiving countries. A model," Working Papers 0621, Banco de España;Working Papers Homepage.
    8. Luis J. Álvarez & Ignacio Hernando, 2006. "Competition and price adjustment in the euro area," Working Papers 0629, Banco de España;Working Papers Homepage.
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    Citations

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    Cited by:

    1. Takauchi, Kazuhiro, 2012. "International R&D Rivalry with a Shipping Firm," MPRA Paper 36843, University Library of Munich, Germany.
    2. Kujal Praveen & Ruiz Juan M., 2007. "Cost Effectiveness of R&D and Strategic Trade Policy," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 7(1), pages 1-35, April.
    3. Frank A.G. den Butter & Seung-gyu Jo, 2009. "Pros and Cons of ‘Backing Winners’ in Innovation Policy," Tinbergen Institute Discussion Papers 09-012/3, Tinbergen Institute.

    More about this item

    Keywords

    product differentiation; strategic trade policy; policy reversals; r&d;

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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