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Strategic Technology Investments in Open Economies

  • Anna Bohnstedt

    ()

  • Christian Schwarz

We study a general equilibrium model of international trade with heterogeneous fi rms, where countries can strategically invest in technology. The countries’ motive is to improve fi rms’ productivity, leading to a competitive advantage in international trade. We are interested in how trade liberalization aff ects this governmental incentive to invest in technology. In the closed economy countries invest if consumers have a suffi ciently high preference for varieties. In the open economy we analyze the Nash-equilibrium policy and the cooperative policy. If there are no cross-country investment spillovers, countries strategically compete in their investment levels and increase their investments with higher trade openness. From a social perspective we have an overinvestment problem. If there are cross-country investment spillovers, we diff erentiate between weak and strong spillovers. In both cases the cooperative solution predicts a positive relationship between investments and trade openness. If there are weak (strong) spillovers, we fi nd a positive (hump-shaped) relationship between technology investments and trade openness in the Nash-equilibrium. From a social perspective we obtain an over (under)-investment problem if spillovers are weak (strong).

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Paper provided by Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen in its series Ruhr Economic Papers with number 0199.

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Length: 36 pages
Date of creation: Aug 2010
Date of revision:
Handle: RePEc:rwi:repape:0199
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  1. Demidova, Svetlana, 2005. "Productivity Improvements and Falling Trade Costs: Boon or Bane?," Working Papers 2-05-1, Pennsylvania State University, Department of Economics.
  2. Bernard, A., 1997. "Exceptional Exporter Performance: Cause, Effect, or Both?," Working papers 97-21, Massachusetts Institute of Technology (MIT), Department of Economics.
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