Innovation union: costs and benefits of innovation policy coordination

Teodora Borota Milicevic, Fabrice Defever, Giammario Impullitti and Adam Hal Spencer

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We build a two-region endogenous growth model to analyse the gains from innovation policy cooperation in an economic union. The model is calibrated to two blocks of the EU: the old and new members. R&D subsidy coordination is motivated by the distortion from subsidy competition, the strategic motive, and by intertemporal knowledge spillovers, which drive growth. The ideas production function features decreasing returns, making growth semi-endogenous, where policy affects growth temporarily. We compute gains from harmonised subsidies, chosen in each region to maximise EU welfare, with respect to competitive and observed subsidies. First, we find substantial gains to coordination, which derive exclusively from the strategic motive. Second, extending to include endogenous idea flows via FDI gives knowledge spillovers as the main driver of coordination gains. Third, extending to fully endogenous growth gives similar results. Fourth, conclusions based on steady state analysis have misleading optimal subsidies and overstate the estimated gains.

Keywords: optimal innovation policy; growth theroy; international policy coordination; EU integration; FDI spillovers (search for similar items in EconPapers)
JEL-codes: F12 F42 F43 O31 O38 O41 (search for similar items in EconPapers)
Pages: 66 pages
Date: 2019-08-02
New Economics Papers: this item is included in nep-cse, nep-ino, nep-int, nep-sbm and nep-tra
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://eprints.lse.ac.uk/103400/ Open access version. (application/pdf)

Related works:
Working Paper: Innovation union:Costs and benefits of innovation policy coordination (2022)
Working Paper: Innovation union: costs and benefits of innovation policy coordination (2019)
Working Paper: Innovation union: Costs and benefits of innovation policy coordination (2019)
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