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Competitiveness-shifting effects and the prisoner?s dilemma in international R&D subsidy wars

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  • Armando J. Garcia Pires

Abstract

We analyze the incentives to subsidize R&D when there is an R&D leader and an R&D follower. Without government intervention, the R&D leader always achieves higher cost competitiveness than the R&D follower. In the presence of R&D subsidies, the country that hosts the R&D follower offers higher R&D subsidies than the country that hosts the R&D leader. As a result, competitiveness-shifting effects arise, since due to the R&D subsidy the R&D follower achieves higher cost competitiveness than the R&D leader. Consequently, the country that hosts the R&D follower does not face a prisoner?s dilemma in international subsidy wars, since even when the foreign country retaliates, it is always better off when it intervenes.

Suggested Citation

  • Armando J. Garcia Pires, 2015. "Competitiveness-shifting effects and the prisoner?s dilemma in international R&D subsidy wars," International Economics, CEPII research center, issue 142, pages 32-49.
    • Handle: RePEc:cii:cepiie:2015-q2-142-3
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    More about this item

    Keywords

    R&D subsidies; Competitiveness-shifting effects;

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • H52 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Education
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L52 - Industrial Organization - - Regulation and Industrial Policy - - - Industrial Policy; Sectoral Planning Methods
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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