International Competition and U.S. R&D Subsidies: A Quantitative Welfare Analysis

Giammario Impullitti

No ECO2008/11, Economics Working Papers from European University Institute

Abstract: The geographical distribution of R&D investment changes dramatically in the 1970s and 1980s. In the early 1970s U.S. firms are the uncontested world leaders in R&D investment in most manufacturing sectors. Later, led by Japan and Europe, foreign firms start challenging American R&D leadership in many sectors of the economy. In this period of increasing competition we also observe a substantial increase in the U.S. R&D subsidy. In a version of the multi-country quality ladder growth model I study the effects of foreign R&D competition on domestic welfare and on the optimal R&D subsidy. I build a new empirical index of international R&D rivalry that can be used to perform quantitative analysis in this type of frameworks. In a calibrated version of the model I focus on the period 1979-1991 and perform the following quantitative exercises: first, I evaluate the quantitative effects of the observed increase in foreign R&D competition on U.S. welfare. I find that the positive growth effect and the negative business-stealing effect of foreign competition on U.S. welfare substantially balance each other, and the overall welfare effect of competition is negligible - less then 1 percent of per-capita consumption. Moreover, using estimates of the effective U.S. R&D subsidy rate, I compute the distance from optimality of the observed subsidy at each level of competition. I find that international competition increases the optimal subsidy and that, surprisingly, the U.S. subsidy observed in the data is fairly close to the optimal subsidy.

Keywords: international competition; R&D-driven growth theory; strategic R&D policy; international trade and growth (search for similar items in EconPapers)
JEL-codes: F12 F13 O41 (search for similar items in EconPapers)
Date: 2008
New Economics Papers: this item is included in nep-com, nep-ino, nep-int, nep-ipr and nep-pr~
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Citations: View citations in EconPapers (14)

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Related works:
Journal Article: INTERNATIONAL COMPETITION AND U.S. R&D SUBSIDIES: A QUANTITATIVE WELFARE ANALYSIS (2010)
Working Paper: International Competition and U.S. R&D Subsidies: A Quantitative Welfare Analysis (2008)
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