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Infant Industry Protection and Industrial Dynamics

  • Ederington, Josh
  • McCalman, Phillip

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).

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 22361.

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Date of creation: Oct 2009
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Handle: RePEc:pra:mprapa:22361
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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, 08.
  2. Miyagiwa, K. & Ohno, Y., 1993. "Closing the Technology Gap Under Protection," Working Papers 93-09, University of Washington, Department of Economics.
  3. Howard Pack & Kamal Saggi, 2006. "Is There a Case for Industrial Policy? A Critical Survey," World Bank Research Observer, World Bank Group, vol. 21(2), pages 267-297.
  4. Andrew B. Bernard & Jonathan Eaton & J. Bradford Jensen & Samuel Kortum, 2000. "Plants and Productivity in International Trade," Boston University - Institute for Economic Development 105, Boston University, Institute for Economic Development.
  5. Mark J. Melitz, 2002. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," NBER Working Papers 8881, National Bureau of Economic Research, Inc.
  6. Reinganum, Jennifer F., . "On the Diffusion of New Technology: A Game Theoretic Approach," Working Papers 312, California Institute of Technology, Division of the Humanities and Social Sciences.
  7. Krugman, Paul, 1980. "Scale Economies, Product Differentiation, and the Pattern of Trade," American Economic Review, American Economic Association, vol. 70(5), pages 950-59, December.
  8. Meredith A. Crowley, 2002. "Do safeguard tariffs and antidumping duties open or close technology gaps?," Working Paper Series WP-02-13, Federal Reserve Bank of Chicago.
  9. Ping Lin & Kamal Saggi, 1999. "Incentives for Foreign Direct Investment under Imitation," Canadian Journal of Economics, Canadian Economics Association, vol. 32(5), pages 1275-1298, November.
  10. Marc J. Melitz & Gianmarco I. P. Ottaviano, 2008. "Market Size, Trade, and Productivity," Review of Economic Studies, Oxford University Press, vol. 75(1), pages 295-316.
  11. Georg Götz, 1999. "Monopolistic Competition and the Diffusion of New Technology," RAND Journal of Economics, The RAND Corporation, vol. 30(4), pages 679-693, Winter.
  12. Ederington, Josh & McCalman, Phillip, 2008. "Endogenous firm heterogeneity and the dynamics of trade liberalization," Journal of International Economics, Elsevier, vol. 74(2), pages 422-440, March.
  13. Gort, Michael & Klepper, Steven, 1982. "Time Paths in the Diffusion of Product Innovations," Economic Journal, Royal Economic Society, vol. 92(367), pages 630-53, September.
  14. Matsuyama, Kiminori, 1990. "Perfect Equilibria in a Trade Liberalization Game," American Economic Review, American Economic Association, vol. 80(3), pages 480-92, June.
  15. Miyagiwa, Kaz & Ohno, Yuka, 1999. "Credibility of Protection and Incentives to Innovate," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(1), pages 143-63, February.
  16. Josh Ederington & Phillip McCalman, 2007. "The Impact of Trade Liberalization on Productivity Within and Across Industries: Theory and Evidence," Monash Economics Working Papers 24-07, Monash University, Department of Economics.
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