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.
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Paper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number
739.
Length: Date of creation: 03 Dec 2006 Date of revision: Handle: RePEc:red:sed006:739
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Find related papers by JEL classification: F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies O31 - Economic Development, Technological Change, and Growth - - Technological Change - - - Innovation and Invention: Processes and Incentives
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