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Robust rules for industrial policy open economies

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  • Dermot Leahy
  • J. Peter Neary
Abstract
The theory of strategic trade policy yields ambiguous recommendations for assistance to exporting firms in oligopolistic industries. However, some writers have suggested that investment subsidies are a more robust recommendation than export subsidies. We show that, although ambiguous in principle, the case for investment subsidies is reasonably robust in practice. Except when functional forms exhibit arbitrary nonlinearities, it holds under both Cournot and Bertrand competition, with either costreducing or market-expanding investment, and with or without spillovers. Only if firms have strong asymmetries in their investment behaviour and engage in Bertrand competition is an investment tax clearly justified.

Suggested Citation

  • Dermot Leahy & J. Peter Neary, 2001. "Robust rules for industrial policy open economies," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 10(4), pages 393-409.
  • Handle: RePEc:taf:jitecd:v:10:y:2001:i:4:p:393-409
    DOI: 10.1080/09638190110073778
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    Cited by:

    1. Arastou Khatibi & Wouter Vergote, 2011. "Trade policy in the face of price and non-price strategies," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 10(1), pages 3-21, April.
    2. Desai, Mihir A. & Hines Jr., James R., 2008. "Market reactions to export subsidies," Journal of International Economics, Elsevier, vol. 74(2), pages 459-474, March.
    3. Qi Duan & Jie Ma, 2017. "A Note on Optimal Industrial Policy Towards Bertrand Homogeneous Duopoly," Australian Economic Papers, Wiley Blackwell, vol. 56(4), pages 292-303, December.
    4. Darong Dai, 2018. "Intellectual property rights and R&D subsidies: are they complementary policies?," Journal of Economics, Springer, vol. 125(1), pages 27-49, September.
    5. Ruiz, Juan, 2003. "Cost effectiveness of R&D and the robustness of strategic trade policy," UC3M Working papers. Economics we030401, Universidad Carlos III de Madrid. Departamento de Economía.
    6. Koh, Yumi & Lee, Gea M., 2023. "R&D subsidies in permissive and restrictive environment: Evidence from Korea," Research Policy, Elsevier, vol. 52(1).
    7. Žigić, Krešimir, 2011. "Does a ‘non-committed’ government always generate lower social welfare than its ‘committed’ counterpart? Strategic trade policy when consumer surplus matters," Journal of Comparative Economics, Elsevier, vol. 39(4), pages 533-556.
    8. Ian Sheldon & Steve McCorriston, 2012. "Climate policy and border tax adjustments: Might industrial organization matter?," EconoQuantum, Revista de Economia y Finanzas, Universidad de Guadalajara, Centro Universitario de Ciencias Economico Administrativas, Departamento de Metodos Cuantitativos y Maestria en Economia., vol. 9(2), pages 7-28, Julio-Dic.
    9. Thanh Le & Cuong Le Van, 2016. "Trade Liberalisation and Optimal R&D Policies in a Model of Exporting Firms Conducting Process Innovation," Post-Print halshs-01314650, HAL.
    10. Steve Mccorriston & Ian Sheldon, 2005. "Export Competition and the Remission of Domestic Environmental Taxes," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 12(5), pages 627-637, September.
    11. McCorriston, Steve & Sheldon, Ian M., 2004. "Tariff Escalation And The Developing Countries: How Can Market Access Be Improved In The Doha Round Of Trade Negotiations?," 2004 Annual meeting, August 1-4, Denver, CO 20156, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    12. Mustafa Caglayan & Murat Usman, 2004. "Incompletely informed policymakers and trade policy in oligopolistic industries," Manchester School, University of Manchester, vol. 72(3), pages 283-297, June.
    13. Kresimir Zigic, 2010. "Second-Best Trade Policies, R&D Spillovers and Government (In)ability to Precommit in an Intra-Industry Trade Framework," CERGE-EI Working Papers wp427, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    14. Li, Changying & Maskus, Keith E., 2006. "The impact of parallel imports on investments in cost-reducing research and development," Journal of International Economics, Elsevier, vol. 68(2), pages 443-455, March.
    15. J. Peter Neary, 2002. "Competition, Trade and Wages," International Economic Association Series, in: David Greenaway & Richard Upward & Katharine Wakelin (ed.), Trade, Investment, Migration and Labour Market Adjustment, chapter 3, pages 28-46, Palgrave Macmillan.
    16. Haaland, Jan I. & Kind, Hans Jarle, 2008. "R&D policies, trade and process innovation," Journal of International Economics, Elsevier, vol. 74(1), pages 170-187, January.
    17. Shengbao Ji & Yin-Fang Zhang & Tooraj Jamasb, 2014. "Reform of the Coal Sector in an Open Economy: The Case of China," Cambridge Working Papers in Economics 1445, Faculty of Economics, University of Cambridge.
    18. Jan Haaland & Hans Jarle Kind, 2006. "Cooperative and Non-Cooperative R&D Policy in an Economic Union," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 142(4), pages 720-745, December.
    19. Dermot Leahy & J. Neary, 2009. "Multilateral subsidy games," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 41(1), pages 41-66, October.
    20. Thanh Le & Cuong Le Van, 2014. "Trade Liberalization and Optimal R&D Policies with Process Innovation," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-01130413, HAL.
    21. Dermot Leahy & J. Peter Neary, 2013. "Oligopoly and Trade," Palgrave Macmillan Books, in: Daniel Bernhofen & Rod Falvey & David Greenaway & Udo Kreickemeier (ed.), Palgrave Handbook of International Trade, chapter 7, pages 197-235, Palgrave Macmillan.
    22. Hoefele, Andreas, 2016. "Endogenous product differentiation and international R&D policy," International Review of Economics & Finance, Elsevier, vol. 41(C), pages 335-346.
    23. Stephen Jui-Hsien Chou, 2013. "R&D Policy Competition with Process Innovation in a Multi-Product Duopoly," Review of Economics & Finance, Better Advances Press, Canada, vol. 3, pages 53-76, November.
    24. Weng, Yungho & Hsu, Kuang-Chung & Liu, Bih Jane, 2019. "Increasing worldwide environmental consciousness and environmental policy adjustment," The Quarterly Review of Economics and Finance, Elsevier, vol. 71(C), pages 205-210.
    25. Satoko Takamatsu, 2013. "A macroeconomics perspective on international coordination in sales taxes," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 22(8), pages 1109-1130, December.

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    More about this item

    Keywords

    Cost-REDUCING Investment; Export Subsidies; Market-EXPANDING Investment; R+D Subsidies; Strategic Industrial Policy; Strategic Trade Policy;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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