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R&D Subsidies, International Knowledge Dispersion, and Fully Endogenous Productivity Growth

Author

Listed:
  • Colin Davis

    (The Institute for the Liberal Arts, Doshisha University)

  • Ken-ichi Hashimoto

    (Graduate School of Economics, Kobe University)

Abstract

This paper develops a two country model to investigate the effects of national R&D subsidies on aggregate product variety and endogenous productivity growth without scale effects. In particular, monopolistically competitive firms invest in process innovation with the aim of lowering production costs. With imperfect knowledge dispersion, the larger of the two countries has a larger share of firms and a greater level of productivity. The higher concentration of relatively productive firms increases the size of knowledge flows between firms, leading to an increase in firm-level employment in innovation. As a result, an economy with asymmetric countries produces a faster rate of growth than one with countries of similar size. The larger scale of firm-level innovation activity reduces market entry, however, and overall product variety falls. Using this framework, we find that a national R&D subsidy has a positive effect on the industry share, relative productivity, and wage rate of the implementing country. Moreover, if the smaller country introduces an R&D subsidy, overall product variety rises but the rate of productivity growth falls. Alternatively, if the larger country introduces an R&D subsidy, the rate of productivity growth rises, but overall product variety may rise or fall. Finally, we briefly consider the effects of a national R&D subsidy on national and world welfare levels.

Suggested Citation

  • Colin Davis & Ken-ichi Hashimoto, 2012. "R&D Subsidies, International Knowledge Dispersion, and Fully Endogenous Productivity Growth," Discussion Papers 1214, Graduate School of Economics, Kobe University.
  • Handle: RePEc:koe:wpaper:1214
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    More about this item

    Keywords

    R&D Subsidy; Knowledge Dispersion; Productivity Growth; Scale Effect;
    All these keywords.

    JEL classification:

    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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