Innovation union: Costs and benefits of innovation policy coordination

Teodora Borota, Fabrice Defever and Giammario Impullitti

No 2019-14, Discussion Papers from University of Nottingham, GEP

Abstract: In this paper, we document large heterogeneity in innovation policy and performance between old and new EU member states, and present firm-level evidence on the close link between foreign direct investment (FDI) spillovers and eastern European firms' innovation. Guided by these facts and motivated by the pressing debate on further EU integration, we build a two-region endogenous growth model to analyse the gains from innovation policy cooperation in an economic union. The two regions, the West (the old members) and the East (the new post-2004 members), feature firms competing in innovation for market leadership, are integrated via free trade and costly technology transfer via FDI and have different innovation performance and policy. Calibrating the model to reproduce key features of the EU economy, we compare the outcomes of an East-West R&D subsidy war with a coop- eration scenario with unified subsidy across regions, and obtain three main results. First,we find that the dynamic gains spurring from the impact of cooperation on the economy's growth rate are sizable and substantially larger than the static gains obtained internalising the strategic motive for subsidies. Second, our model suggests that the presence of FDI and multinational production alleviates the strategic motive and increases the gains from cooperation. Third, separating FDI and innovation policy generates larger gains from cooperation, a policy complementarity driven by the knowledge spillovers carried by FDI.

Keywords: Optimal innovation policy; growth theory; international policy coordination; EU integration; FDI spillovers. (search for similar items in EconPapers)
Date: 2019
New Economics Papers: this item is included in nep-cse, nep-ino, nep-int, nep-sbm, nep-tid and nep-tra
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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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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Persistent link: https://EconPapers.repec.org/RePEc:not:notgep:2019-14

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