Franchise Fee, Tax/Subsidy Policies and Economic Growth

In this paper, we take a new look at the effects of the subsidy policy and the government’s R&D activities in an R&D-based growth model. The government not only subsidizes the R&D cost of the firms but also engages in R&D activities and, in addition, levies a specific tax on the firms producing the final and the intermediate goods, respectively, in order to finance the expenditure. We find that in the economy there exist two balanced equilibrium growth paths. In an economy with a high growth path, the government’s subsidy policy and its R&D activities will crowd out the private R&D activities, and hence the fiscal policies are of no help to the economic growth. In other words, the intermediate goods firms play an important role in driving the economic growth. By contrast, in an economy with a low growth path, the government that directly engages in R&D activities plays an important role in economic growth. The fiscal policies of the government have a positive effect on the economic growth.