OPTIMAL EXPORT POLICY IN THE PRESENCE OF R&D INVESTMENT

Tsuyoshi Toshimitsu

No 17, Discussion Paper Series from School of Economics, Kwansei Gakuin University

Abstract: The purpose of this paper is to analyze the optimal export policy in a two-stage game in which a domestic and a foreign firm compete in price and R&D investment. Under international Bertrand duopoly, an export subsidy directly promotes excess price competition, as delineated by Eaton and Grossman (1986). But, in the presence of international R&D rivalry, an export subsidy indirectly reduces the rival's R&D level, and thereby raises its cost. This effect offsets the negative effect of the export subsidy resulting in excess price competition. We show that an export subsidy (tax) policy is optimal if the relative return to R&D is great (small), provided that a government can precommit to an ex ante optimal export policy.

Pages: 27 pages
Date: 1997-09, Revised 1997-09
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Persistent link: https://EconPapers.repec.org/RePEc:kgu:wpaper:17

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