R&D Subsidies and Foreign Direct Investment

Manuel Gómez and Tiago Sequeira

Open Economies Review, 2016, vol. 27, issue 4, No 7, 769-793

Abstract: Abstract We devise a model in which domestic firms do applied R&D, which can be subsidized by the government, and foreign firms with superior technology can enter in the domestic market. Foreign Direct Investment can act as a substitute of subsidies to improve domestic R&D, the share of domestic leading firms and consumption. Relatively closed economies may benefit from R&D subsidization while relatively open economies may not. For relatively low growth of the technological frontier, it is optimal to subsidize R&D and close the economy to foreign investment but the opposite happens for relatively high growth. Numerical simulations show the economy dynamics after policy experiments.

Keywords: Convergence; Stability; Foreign direct investment; R&D (search for similar items in EconPapers)
JEL-codes: C62 O11 O41 (search for similar items in EconPapers)
Date: 2016
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DOI: 10.1007/s11079-016-9390-3

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