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Robust rules for industrial policy open economies

Dermot Leahy () and J. Peter Neary ()

The Journal of International Trade & Economic Development, 2001, vol. 10, issue 4, 393-409

Abstract: The theory of strategic trade policy yields ambiguous recommendations for assistance to exporting firms in oligopolistic industries. However, some writers have suggested that investment subsidies are a more robust recommendation than export subsidies. We show that, although ambiguous in principle, the case for investment subsidies is reasonably robust in practice. Except when functional forms exhibit arbitrary nonlinearities, it holds under both Cournot and Bertrand competition, with either costreducing or market-expanding investment, and with or without spillovers. Only if firms have strong asymmetries in their investment behaviour and engage in Bertrand competition is an investment tax clearly justified.

Keywords: Cost-REDUCING Investment; Export Subsidies; Market-EXPANDING Investment; R+D Subsidies; Strategic Industrial Policy; Strategic Trade Policy (search for similar items in EconPapers)
Date: 2001
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