International Competition, Growth and Optimal R&D Subsidies
No 739, 2006 Meeting Papers from Society for Economic Dynamics
In this paper I examine the effects of international technological competition on innovation, growth, and optimal R&D subsidies. I focus on a particular dimension of competition: the share of industries where domestic and foreign research firms compete for innovation. In a version of the fully-endogenous quality-ladder growth model I show that the effect of competition on innovation and growth depends on the specification of the research technology. Secondly, I find that increases in foreign competition trigger a business-stealing effect that reduces income and welfare and, regardless of the innovation effect, raises the optimal domestic R&D subsidy. Intuitively, the higher the threat of international competition the more instrumental innovation subsidies will be in helping domestic incumbent firms to retain their shares of the global market. Thirdly, I perform a quantitative exercise: I first build an empirical index of international technological competition and find that in the OECD countries the share of competitive sectors increased from 35 percent in 1973 to 70 percent in 1989. Then, I use this evidence to evaluate the optimality of the U.S. R&D subsidy response to observed competition in that period. I find a welfare loss of the observed policy, relative to the optimal, ranging between 0.2 and 0.5 percentage points of quality-adjusted per-capita consumption. Finally, I extend the model to account for strategic policy complementarities and show that the positive effect of competition on the optimal subsidy is robust to this set up. In addition, I find that competition increases the benefits from R&D policy cooperation.
Keywords: international competition; trade and gowth; endogenous technical change; strategic industrial policy (search for similar items in EconPapers)
JEL-codes: F12 F43 O31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-com, nep-ino, nep-ipr and nep-pr~
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed
Downloads: (external link)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:red:sed006:739
Access Statistics for this paper
More papers in 2006 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().