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R&D Policies, Trade and Process InnovationJan I. HaalandNorwegian School of Economics & Business Administration (NHH); Centre for Economic Policy Research (CEPR); Norwegian School of Economics (NHH) - Department of Economics Hans Jarle KindNorwegian School of Economics & Business Administration (NHH); CESifo (Center for Economic Studies and Ifo Institute for Economic Research); Norwegian School of Economics (NHH) - Department of Economics December 2004 CEPR Discussion Paper No. 4784 Abstract: We set up a simple trade model with two countries hosting one firm each. The firms invest in cost-reducing R&D, and each government may grant R&D subsidies to the domestic firm. We show that it is optimal for a government to provide higher R&D subsidies the lower the level of trade costs, even if the firms are independent monopolies. If firms produce imperfect substitutes, policy competition may become so fierce that only one of the firms survives. International policy harmonization eliminates policy competition and ensures a symmetric outcome. However, it is shown that harmonization is not necessarily welfare-maximizing. The optimal coordinated policies may imply an asymmetric outcome with R&D subsidies to only one of the firms.
Number of Pages in PDF File: 36 Keywords: Trade, R&D, subsidies, process innovation JEL Classification: F12, F13, F15 working papers seriesDate posted: March 8, 2005Suggested CitationContact Information
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