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Strategic Investment and the Gains from Trade

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  • Gerda Dewit

    (Department of Economics Finance and Accounting, National University of Ireland, Maynooth)

  • Dermot Leahy

    (Department of Economics Finance and Accounting, National University of Ireland, Maynooth)

Abstract

This paper examines how trade liberalisation affects innovation, profits and welfare when firms are engaging in strategic R&D investment. We show that there are multiple equilibria including an autarky equilibrium for a range of high but non-prohibitive trade costs. At lower trade costs, only the trading equilibrium survives. Welfare is U-shaped in the trade costs, so a small fall in trade costs can be welfare reducing. However we find a threshold level of the effectiveness of investment above which trade is always welfare superior to autarky

Suggested Citation

  • Gerda Dewit & Dermot Leahy, 2011. "Strategic Investment and the Gains from Trade," Economics Department Working Paper Series n216-11.pdf, Department of Economics, National University of Ireland - Maynooth.
    • Handle: RePEc:may:mayecw:n216-11.pdf
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    File URL: http://repec.maynoothuniversity.ie/mayecw-files/N216-11.pdf
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    References listed on IDEAS

    as
    1. Long, Ngo Van & Raff, Horst & Stähler, Frank, 2011. "Innovation and trade with heterogeneous firms," Journal of International Economics, Elsevier, vol. 84(2), pages 149-159, July.
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    Cited by:

    1. Takauchi, Kazuhiro, 2012. "International R&D Rivalry with a Shipping Firm," MPRA Paper 36843, University Library of Munich, Germany.

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    More about this item

    Keywords

    Reciprocal Markets; Strategic R&D Investment; Trade Costs; Trade Liberalisation; Effectiveness of R&D.;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F15 - International Economics - - Trade - - - Economic Integration
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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