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LEARNING BY DOING AND STRATEGIC TRADE POLICY

Hassan Benchekroun (), Ngo Van Long () and Huilan Tian

Departmental Working Papers from McGill University, Department of Economics

Abstract: We model international rivalry between a domestic firm that is going through a leaming-by-doing phase, and a mature foreign rival. We show that the optimal production subsidy for the domestic firm depends on the degree of strategic sophistication of the foreign firm.Optimal production subsidy rules are derived under various scenarios. They are shown to be very sensitive to the specification of the game between the domestic and the foreign firms. The conduct of strategic trade policy thus requires that the home government be well informed about the degree of strategic sophistication of the foreign firm. In particular, we show that whether the government should help the domestic firm relatively more in its early infancy, with a subsidy that decreases as the firm grows, or it should promise a greater reward as the firm becomes more mature, depends on the strategic sophistication of the foreign firm.

Date: 1998-02
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Journal Article: Learning-by-Doing and Strategic Trade Policy (1999)
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