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Strategic Technology Investments in Open Economies

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  • Bohnstedt, Anna
  • Schwarz, Christian

Abstract

We study a general equilibrium model of international trade with heterogeneous firms, where countries can strategically invest in technology. The countries' motive is to improve firms' productivity, leading to a competitive advantage in international trade. We are interested in how trade liberalization affects this governmental incentive to invest in technology. In the closed economy countries invest if consumers have a sufficiently high preference for varieties. In the open economy we analyze the Nash-equilibrium policy and the cooperative policy. If there are no cross-country investment spillovers, countries strategically compete in their investment levels and increase their investments with higher trade openness. From a social perspective we have an overinvestment problem. If there are cross-country investment spillovers, we differentiate between weak and strong spillovers. In both cases the cooperative solution predicts a positive relationship between investments and trade openness. If there are weak (strong) spillovers, we find a positive (hump-shaped) relationship between technology investments and trade openness in the Nash-equilibrium. From a social perspective we obtain an over (under)-investment problem if spillovers are weak (strong).

Suggested Citation

  • Bohnstedt, Anna & Schwarz, Christian, 2010. "Strategic Technology Investments in Open Economies," Ruhr Economic Papers 199, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    • Handle: RePEc:zbw:rwirep:199
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    More about this item

    Keywords

    heterogeneous firms; technology investments; monopolistic competition; strategic trade policy;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

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