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R&D Subsidies, Innovation Location, and Productivity Growth

Colin Davis and Ken-ichi Hashimoto

ISER Discussion Paper from Institute of Social and Economic Research, Osaka University

Abstract: This paper studies how national research subsidies affect productivity growth and national welfare through adjustments in the geographic location of research and development (R&D) across countries. 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. With trade costs and imperfect international knowledge diffusion, the larger country has a greater share of industry and tends to host a larger share of innovation. In this setting, we find 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: 2023-12
New Economics Papers: this item is included in nep-cse, nep-eff, nep-geo, nep-gro, nep-ino, nep-knm, nep-sbm, nep-tid and nep-ure
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