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Infant Industry Protection and Industrial Dynamics

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  • Ederington, Josh
  • McCalman, Phillip

Abstract

A perennial case for industrial policy is based on the protection of young or emerging industries. Despite a natural association with concepts of life cycles, industrial policy has not been analyzed in the context of an industry life-cycle model. In particular, an important life-cycle characteristic, the potential for very large changes in the rate of net entry, is ignored. In this paper, we demonstrate how the impact of industrial policy depends critically on the entry and exit dynamics within an industry. In particular, we construct a model of technology adoption in which the number of firms is endogenous, and derive a set of novel predictions about the effects of protection on firm technology decisions. Specifically, we show that permanent protection can induce earlier adoption, but also decreases the probability that a given firm adopts the new technology. Likewise, we demonstrate that reducing the duration of protection results in faster adoption than permanent protection, but also reduces a given firms probability of adoption. Finally, we show that, for industries characterized by flexibility in firm numbers, protection does not change the rate of technology adoption but does increase the size and probability of a shakeout (large scale net exit).

Suggested Citation

  • Ederington, Josh & McCalman, Phillip, 2009. "Infant Industry Protection and Industrial Dynamics," MPRA Paper 22361, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:22361
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    References listed on IDEAS

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    1. Josh Ederington & Phillip McCalman, 2009. "International Trade And Industrial Dynamics," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 50(3), pages 961-989, August.
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    6. Howard Pack & Kamal Saggi, 2023. "Is There a Case for Industrial Policy? A Critical Survey," World Scientific Book Chapters, in: Kamal Saggi (ed.), Technology Transfer, Foreign Direct Investment, and the Protection of Intellectual Property in the Global Economy, chapter 26, pages 585-615, World Scientific Publishing Co. Pte. Ltd..
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    13. Crowley, Meredith A., 2006. "Do safeguard tariffs and antidumping duties open or close technology gaps?," Journal of International Economics, Elsevier, vol. 68(2), pages 469-484, March.
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    3. Yukiko Sawada, 2017. "The effect of technology choice on specialization and welfare in a two‐country model," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 50(4), pages 1104-1129, November.
    4. Triulzi, G., 2014. "Technology life cycle and specialization patterns of latecomer countries: The case of the semiconductor industry," MERIT Working Papers 2014-012, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
    5. Hassan Benchekroun & Ngo Long, 2018. "Nurturing an Infant Industry by Markovian Subsidy Schemes," Dynamic Games and Applications, Springer, vol. 8(3), pages 519-541, September.

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    • F1 - International Economics - - Trade

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