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R&D Subsidy and Import Substitution: Growing in the Shadow of Protection

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Abstract

I study the effect of an innovation subsidy on the growth of firms in a developing country. Using administrative microdata for Brazil and difference-in-differences, I find that innovation subsidies drive firm growth by facilitating firm entry into high-tariff markets with domestically produced versions of foreign goods. After receiving an innovation subsidy, firms issue more patents, expand their workforce, and diversify their product line. However, these patents receive minimal citations, while also heavily citing foreign patents. Firms increase imports of foreign inputs and expand their product line towards products with high import tariff. Despite that, in the most conservative estimate, every $1 of innovation subsidy generated $10 in present value wages.

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  • Gustavo de Souza, 2023. "R&D Subsidy and Import Substitution: Growing in the Shadow of Protection," Working Paper Series WP 2023-37, Federal Reserve Bank of Chicago.
    • Handle: RePEc:fip:fedhwp:97212
    DOI: 10.21033/wp-2023-37
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    References listed on IDEAS

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    1. Raffaello Bronzini & Eleonora Iachini, 2014. "Are Incentives for R&D Effective? Evidence from a Regression Discontinuity Approach," American Economic Journal: Economic Policy, American Economic Association, vol. 6(4), pages 100-134, November.
    2. Manelici, Isabela & Pantea, Smaranda, 2021. "Industrial policy at work: Evidence from Romania’s income tax break for workers in IT," European Economic Review, Elsevier, vol. 133(C).
    3. Irwin, Douglas A., 2000. "Did Late-Nineteenth-Century U.S. Tariffs Promote Infant Industries? Evidence from the Tinplate Industry," The Journal of Economic History, Cambridge University Press, vol. 60(2), pages 335-360, June.
    4. Diego Restuccia, 2004. "Barriers to Capital Accumulation and Aggregate Total Factor Productivity," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(1), pages 225-238, February.
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    Cited by:

    1. Elodie Andrieu & John Morrow, 2024. "Can Firm Subsidies Spread Growth?," PSE Working Papers halshs-04747880, HAL.
    2. Elodie Andrieu & John Morrow, 2024. "Can Firm Subsidies Spread Growth?," PSE Working Papers halshs-04721319, HAL.
    3. Andrieu, Elodie & Morrow, John, 2024. "Can firm subsidies spread growth?," LSE Research Online Documents on Economics 126775, London School of Economics and Political Science, LSE Library.

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    Keywords

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    JEL classification:

    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights
    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology
    • O25 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Industrial Policy

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