Selling High-Tech Inputs to the Enemy

Trade wars are being waged by the United States and Japan. Exports of high-tech inputs (e.g., fluorinated polyimides in semiconductor devices) are now curbed by these countries. Manufacturing high-quality outputs require the use of high-tech inputs. Exports of high-tech inputs may not only increase the Northern innovator’s profit in the short run but also may create permanent rivals in the downstream market in developing countries. This paper investigates whether it is profitable for a Northern innovator to export high-tech inputs to foreign competitors who would compete in the downstream market. If wage disparity exists between the two countries when products are differentiated, selling the high-tech input to foreign competitors may be mutually beneficial for both the innovator and the foreign rivals in the South. When the finished products are homogeneous, selling only the high-tech input to a sufficiently large number of Southern firms, and exiting from the finished product market, may increase the innovator’s profit. Highlights: • It may be mutually profitable for the Northern innovator and Southern rivals to export and import the high-tech input in the homogeneous model. • When the final products are perfect substitutes, there is no incentive for the Northern innovator to sell the high-tech input to two Southern rivals. • It may be profitable for the Northern firm to stop producing the finished product, and to sell only the high-tech input to a sufficiently large number of Southern rivals.