IDEAS home Printed from
   My bibliography  Save this paper

Welfare and growth impacts of innovation policies in a small, open economy. An applied general equilibrium analysis




We explore how innovation incentives in a small, open economy should be designed in order to achieve the highest welfare and growth, by means of a computable general equilibrium model with R&D-driven endogenous technological change embodied in varieties of capital. We study policy alternatives targeted towards R&D, capital varieties formation, and domestic investments in capital varieties. Subsidising domestic investments, thereby excluding stimuli to world market deliveries, generates less R&D, capital formation, economic growth, and welfare, than do the other alternatives, reflecting that the domestic market for capital varieties is limited. Directing support to R&D rather than to capital formation generates stronger economic growth, a higher number of patents and capital varieties, and a higher share of R&D in total production. However, it costs in terms of lower production within each firm, where presence of sunk patent costs and mark-ups result in efficiency losses. The welfare result is, thus, slightly lower.

Suggested Citation

  • Brita Bye & Taran Fæhn & Tom-Reiel Heggedal, 2007. "Welfare and growth impacts of innovation policies in a small, open economy. An applied general equilibrium analysis," Discussion Papers 510, Statistics Norway, Research Department.
  • Handle: RePEc:ssb:dispap:510

    Download full text from publisher

    File URL:
    Download Restriction: no

    References listed on IDEAS

    1. Bovenberg, A Lans & Goulder, Lawrence H, 1993. " Promoting Investment under International Capital Mobility: An Intertemporal General Equilibrium Analysis," Scandinavian Journal of Economics, Wiley Blackwell, vol. 95(2), pages 133-156.
    2. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth through Creative Destruction," Econometrica, Econometric Society, vol. 60(2), pages 323-351, March.
    3. Bovenberg, A.L. & Goulder, L.H., 1993. "Promoting investment under international capital mobility : An intertemporal general equilibrium analysis," Other publications TiSEM 29893d08-baf5-491e-9404-3, Tilburg University, School of Economics and Management.
    4. Sen, Partha & Turnovsky, Stephen J., 1989. "Deterioration of the terms of trade and capital accumulation: A re-examination of the Laursen-Metzler effect," Journal of International Economics, Elsevier, vol. 26(3-4), pages 227-250, May.
    5. Alvarez-Pelaez, Maria J. & Groth, Christian, 2005. "Too little or too much R&D?," European Economic Review, Elsevier, vol. 49(2), pages 437-456, February.
    6. Erling Holmøy & Torbjørn Hægeland, 1997. "Aggregate Productivity Effects of Technology Shocks in a Model of Heterogeneous Firms: The Importance of Equilibrium Adjustments," Discussion Papers 198, Statistics Norway, Research Department.
    7. Markusen, James R., 1981. "Trade and the gains from trade with imperfect competition," Journal of International Economics, Elsevier, vol. 11(4), pages 531-551, November.
    8. Mads Greaker & Knut Einar Rosendahl, 2006. "Strategic Climate Policy in Small, Open Economies," Discussion Papers 448, Statistics Norway, Research Department.
    9. Otto, Vincent M. & Loschel, Andreas & Dellink, Rob, 2007. "Energy biased technical change: A CGE analysis," Resource and Energy Economics, Elsevier, vol. 29(2), pages 137-158, May.
    10. Leahy, Dermot & Neary, J Peter, 1999. "R&D Spillovers and the Case for Industrial Policy in an Open Economy," Oxford Economic Papers, Oxford University Press, vol. 51(1), pages 40-59, January.
    11. Hertel, Thomas W., 1994. "The 'procompetitive' effects of trade policy reform in a small, open economy," Journal of International Economics, Elsevier, vol. 36(3-4), pages 391-411, May.
    12. Benjamin Russo, 2004. "A cost-benefit analysis of R&D tax incentives," Canadian Journal of Economics, Canadian Economics Association, vol. 37(2), pages 313-335, May.
    13. Goulder, Lawrence H. & Mathai, Koshy, 2000. "Optimal CO2 Abatement in the Presence of Induced Technological Change," Journal of Environmental Economics and Management, Elsevier, vol. 39(1), pages 1-38, January.
    14. Thomas M. Steger, 2005. "Welfare Implications of Non-scale R&D-based Growth Models," Scandinavian Journal of Economics, Wiley Blackwell, vol. 107(4), pages 737-757, December.
    15. Goulder, Lawrence H. & Schneider, Stephen H., 1999. "Induced technological change and the attractiveness of CO2 abatement policies," Resource and Energy Economics, Elsevier, vol. 21(3-4), pages 211-253, August.
    16. Hwan C . Lin & Benjamin Russo, 2002. "Growth Effects of Capital Income Taxes: How Much Does Endogenous Innovation Matter?," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 4(4), pages 613-640, October.
    Full references (including those not matched with items on IDEAS)


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Brita Bye & Karl Jacobsen, 2009. "On general versus emission saving R&D support," Discussion Papers 584, Statistics Norway, Research Department.

    More about this item


    Applied general equilibrium; Endogenous growth; Research and Development;

    JEL classification:

    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • O38 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Government Policy
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

    NEP fields

    This paper has been announced in the following NEP Reports:


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ssb:dispap:510. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (L Maasø). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.