International Technological Competition and Optimal R&D Subsidies in the US: 1973-1990

International technological competition implied by the global distribution of R&D investment changed dramatically in the 1970s and 1980s. In the early 1970s the distribution is very skewed: US firms were the uncontested world leaders in research investment in most manufacturing sectors. Later, with Japan's and Europe's technological catching-up, foreign firms started challenging american leaders in many sectors of the economy. What was the effects on US national welfare of foreign innovators entering sectors previously dominated by american firms? What are the implications for the optimal US R&D subsidy? This paper builds an empirical measure of international R&D rivalry that tracks down these changes in international competition in innovation. In a version of the quality-ladders endogenous growth model the paper quantitatively evaluates the effects of the observed increase in competition on US welfare, and compute the welfare losses produced by the gap between the actual and the optimal R&D subsidy response to competition.