R&D Spillovers and the Case for Industrial Policy in an Open Economy
In this paper we consider the case for subsidies towards firms which generate R&D spillovers in open economies. We show that in the presence of strategic behaviour by firms many expected results are overturned. Local R&D spillovers to other domestic firms may justify an R&D tax rather than a subsidy; R&D cooperation by local firms over-internalizes the externality and also justifies an R&D tax; and international spillovers which benefit foreign firms may justify a subsidy, even though the government cares only about the profits of home firms.
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