Allocation of the Public R&D Budget: The Impact of International Competitive Advantages and R&D Alliances

David Silei

International Economic Journal, 2021, vol. 35, issue 2, 171-204

Abstract: I consider a two-country model, in which two asymmetric firms invest in R&D to increase their competitiveness and compete over the supply of a homogeneous product, and the government grants R&D subsidies to increase welfare. In this setting I show that optimal R&D policy is affected by industrywide international competitive advantages. Similar to conventional wisdom on strategic trade policy, competitive advantages have a positive impact on the optimal amount of R&D subsidy in the case of R&D competition. With international R&D cooperation, this conclusion is reversed: subsidising the more competitive firm may have, if any, very little impact on domestic welfare.

Date: 2021
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DOI: 10.1080/10168737.2021.1916773

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