R&D SUBSIDIES, INTERNATIONAL KNOWLEDGE DIFFUSION, AND FULLY ENDOGENOUS PRODUCTIVITY GROWTH

Colin Davis and Ken-ichi Hashimoto

Macroeconomic Dynamics, 2015, vol. 19, issue 8, 1816-1838

Abstract: This paper investigates the effects of R&D subsidies on aggregate product variety and endogenous productivity growth without scale effects. In a two-country model with imperfect knowledge diffusion, the larger country has a greater share of firms with higher productivity levels. The concentration of relatively productive firms increases knowledge flows between firms, causing an increase in firm-level employment in innovation. Accordingly, the aggregate growth rate is higher when counties are asymmetric than when they are similar in size. The larger scale of firm-level innovation activity reduces market entry, however, and aggregate product variety falls. In this framework, national R&D subsidies have positive effects on the industry share, relative productivity, and wage rate of the implementing country. If the smaller country introduces an R&D subsidy, aggregate product variety rises and productivity growth falls. If the larger country introduces an R&D subsidy, productivity growth rises, but aggregate product variety may rise or fall.

Date: 2015
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