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Innovation and Trade Policy in a Globalizing World

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  • Ufuk Akcigit

    (University of Chicago)

Abstract

We assess the role of import tariffs and R&D subsidies as policy responses to foreign technological competition. To this end, we build a general equilibrium growth model embedding a Ricardian framework of trade where firm innovation shapes endogenously the dynamics of technology and market leadership in a world with countries at differ- ent stages of development. Knowledge spillovers and decreasing returns to knowledge accumulation drive cross-country technological convergence. Firms’ R&D decisions are driven by the size of the market, the effort to escape competitive pressures, domestic and international business stealing, and technology spillovers. A calibrated version of the model reproduces the foreign technological catch-up the U.S. experienced by the 1970s and early 1980s. Accounting for transitional dynamics, we show that foreign technolog- ical acceleration hurts the U.S. welfare in the short and medium run through business stealing, but generates long-run benefits via higher quality of imported goods and higher domestic innovation in the U.S. induced by escape-competition effect. The model suggests that the introduction of Research and Experimentation Tax Credit in 1981 proves to be an effective policy response to foreign competition, generating substantial welfare gains. A counterfactual exercise shows that increasing trade barriers as an alternative policy re- sponse produces gains only in the very short run, leading to large losses in the medium and long run. Protectionist measures generate large dynamic losses from trade, distort- ing the impact of openness on innovation incentives and productivity growth.

Suggested Citation

  • Ufuk Akcigit, 2017. "Innovation and Trade Policy in a Globalizing World," 2017 Meeting Papers 1627, Society for Economic Dynamics.
  • Handle: RePEc:red:sed017:1627
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    References listed on IDEAS

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    Cited by:

    1. Johannes L EugsterInter & Giang Ho & Florence Jaumotte & Roberto Piazza, 2022. "International knowledge spillovers [The race between man and machine: implications of technology for growth, factor shares, and employment]," Journal of Economic Geography, Oxford University Press, vol. 22(6), pages 1191-1224.
    2. Pian Shu & Claudia Steinwender, 2019. "The Impact of Trade Liberalization on Firm Productivity and Innovation," Innovation Policy and the Economy, University of Chicago Press, vol. 19(1), pages 39-68.

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