Policy Instruments, Patents and International Technology Diffusion in a North-South Duopoly

This paper analyzes the relationship between public policy instruments and technology diffusion in a North-South duopoly, within an inter-temporal model where time is continuous. Initially, the Northern firm benefits from a new technology while the Southern firm uses only an old technology. There is a monopoly period with the new technology for the Northern firm. At the end, there is then technology diffusion from the Northern firm to the Southern firm. The Northern firm files patent in order to slow down diffusion. This article studies the impact of policy instruments: (i) a production subsidy, a patent subsidy and an import tariff implemented by the Northern country, (ii) a production subsidy, a public Research and Development investment and an import tariff implemented by the Southern country. The results show that the Northern government’s policies slow down technology diffusion by increasing the monopoly period with the new technology while the Southern government’s policies accelerate it. Welfare analysis demonstrates that governments are encouraged to implement each policy instrument, except in the case of patent subsidy. The Northern government is encouraged to tax patent expenditures. Nevertheless, the patent subsidy may be optimal if the Northern firm invests in Research and Development due to its technological advantage with the patent.