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International Schumpeterian Competition and Optimal R&D subsidies

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  • Giammario Impullitti

Abstract

This paper studies the welfare effects of international competition in the market for innovations, and analyzes how competition affects the costs and the benefits of cooperative and non-cooperative R&D subsidies. I set up a two-country quality-ladder growth model where the leader, the home country, has R&D firms innovating in all sectors of the economy, and the follower, the foreign country, shows innovating firms only in a subset of industries. The measure of the set of sectors where R&D workers from both countries compete for innovation determines the scale of international Schumpeterian competition. Both governments engage in a strategic R&D subsidy game and respond optimally to changes in competition. For a given level of subsidies, increases in foreign competition raise the quality of goods available (growth effect) and lowers domestic profits (business-stealing effect); the overall effect of competition on domestic welfare depends on the relative strength of these two counteracting forces. When governments play a strategic subsidy game, increases in foreign competition trigger a defensive innovation policy mechanism that raises the optimal domestic R&D subsidy. Cooperation in subsidies leads both countries to set higher subsidies. Finally, while cooperation is beneficial for the global economy, there exists a threshold level of competition below which the home country experiences welfare losses under cooperation.

Suggested Citation

  • Giammario Impullitti, 2007. "International Schumpeterian Competition and Optimal R&D subsidies," Economics Working Papers ECO2007/55, European University Institute.
  • Handle: RePEc:eui:euiwps:eco2007/55
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    Cited by:

    1. Chu, Angus C. & Cozzi, Guido & Lai, Ching-Chong & Liao, Chih-Hsing, 2015. "Inflation, R&D and growth in an open economy," Journal of International Economics, Elsevier, vol. 96(2), pages 360-374.
    2. Giammario Impullitti, 2010. "International Competition And U.S. R&D Subsidies: A Quantitative Welfare Analysis," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 51(4), pages 1127-1158, November.

    More about this item

    Keywords

    international competition; endogenous technical change; growth theory; strategic R&D subsidies; international policy cooperation;

    JEL classification:

    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O38 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Government Policy
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

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