R&D Subsidies, Innovation Location, and Productivity Growth

Colin Davis and Ken‐ichi Hashimoto

Review of International Economics, 2025, vol. 33, issue 4, 911-920

Abstract: This paper studies how research subsidies affect productivity growth and welfare through adjustments in the geographic location of research and development (R&D). Our two‐country framework features a tension in the firm‐level innovation location decision between accessing technical knowledge and sourcing low‐cost, high‐skilled labor. We show that an R&D subsidy expands the implementing country's share of innovation and raises the rate of productivity growth. Although the non‐implementing country experiences a welfare improvement, the rising cost of the policy generates a concave relationship between the R&D subsidy and the welfare of the implementing country, yielding an optimal R&D subsidy rate.

Date: 2025
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