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Innovation and Trade Policy in a Globalized World

Author

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  • Ufuk Akcigit
  • Sina T. Ates
  • Giammario Impullitti

Abstract

How do import tariffs and R&D subsidies help domestic firms compete globally? How do these policies affect aggregate growth and economic welfare? To answer these questions we build a dynamic general equilibrium growth model where firm innovation endogenously determines the dynamics of technology, market leadership and trade flows, in a world with two large open economies at different stages of development. Firms R&D decisions are driven by (i) the defensive innovation motive, (ii) the expansionary innovation motive, and (iii) technology spillovers. The theoretical investigation illustrates that, statistically, globalization boosts domestic innovation through induced international competition. Accounting for transitional dynamics, we use our model for policy evaluation and compute optimal policies over different time horizons. The model suggests that the introduction of the Research and Experimentation Tax Credit in 1981 proves to be an effective policy response to foreign competition, generating substantial welfare gains in the long run. A counterfactual exercise shows that increasing tariffs as an alternative policy response improves domestic welfare only when the policymaker cares about the very short run, or when there is retaliation by the foreign economy. Protectionist measures generate large dynamic losses by distorting the impact of openness on innovation incentives and productivity growth. Finally our model predicts that a more globalized world entails less government intervention, thanks to innovation-stimulating effects of intensified international competition.

Suggested Citation

  • Ufuk Akcigit & Sina T. Ates & Giammario Impullitti, 2018. "Innovation and Trade Policy in a Globalized World," CEP Discussion Papers dp1589, Centre for Economic Performance, LSE.
  • Handle: RePEc:cep:cepdps:dp1589
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    File URL: http://cep.lse.ac.uk/pubs/download/dp1589.pdf
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    References listed on IDEAS

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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Innovation and Trade Policy in a Globalized World
      by Christian Zimmermann in NEP-DGE blog on 2019-01-11 22:50:59

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    Cited by:

    1. Philippe Aghion, Antonin Bergeaud, Matthieu Lequien, Marc J. Melitz, 2018. "The Impact of Exports on Innovation: Theory and Evidence," Working papers 678, Banque de France.

    More about this item

    Keywords

    economic growth; short- and long-run gains from globalization; foreign technological catching-up; innovation policy; trade policy; competition;

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • F60 - International Economics - - Economic Impacts of Globalization - - - General
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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