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Trade Liberalization and Optimal R&D Policies with Process Innovation

Author

Listed:
  • Thanh Le

    (UQ [All campuses : Brisbane, Dutton Park Gatton, Herston, St Lucia and other locations] - The University of Queensland)

  • Cuong Le Van

    (IPAG - Business School, PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, VCREME - Van Xuan Center of Research in Economics, Management and Environment, CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)

Abstract
We set up a theoretical framework to discuss the impact of trade liberalization and R&D policies on domestic exporting firms' incentive to innovate and social welfare. In this framework, exporting firms invest in R&D to reduce their production costs and, in return, receive R&D subsidies from the government. While firms target at maximizing their profits, the government aims to maximize the social welfare. We consider different settings of firm competition to explore their strategic behaviors as well as the government's strategic behavior at the policy stage. We find that trade liberalization in the foreign market always increases firms' output sales and social welfare and, in most cases, leads to higher R&D investments and productivity at firms as well as industry level. When firms are independent monopolies in the overseas market, it is optimal for the government not to provide any R&D subsidy. When goods are close substitutes, the social optimum can be achieved as a Nash equilibrium by applying an optimal R&D tax. Trade liberalization induces a higher R&D tax rate to be levied on firms. When firms also conduct business in the home market, it is always optimal for the government to provide firms with a financial support to their R&D activity. While this R&D subsidy is decreasing in the trade cost when firms are independent monopolies, its monotonicity in the trade costs is determined by the convexity of the R&D cost function when firms produce close substitutes.

Suggested Citation

  • Thanh Le & Cuong Le Van, 2014. "Trade Liberalization and Optimal R&D Policies with Process Innovation," Post-Print halshs-01130413, HAL.
    • Handle: RePEc:hal:journl:halshs-01130413
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-01130413
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    References listed on IDEAS

    as
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    Cited by:

    1. Lucian-Florin Onișor, 2015. "Marketing and Business Development between Idea, Scientific Discovery and Innovation," International Conference on Marketing and Business Development Journal, The Bucharest University of Economic Studies, vol. 1(1), pages 29-39, July.
    2. repec:ipg:wpaper:2014-488 is not listed on IDEAS
    3. repec:ipg:wpaper:2014-504 is not listed on IDEAS
    4. repec:ipg:wpaper:2014-499 is not listed on IDEAS
    5. repec:ipg:wpaper:2014-574 is not listed on IDEAS
    6. repec:ipg:wpaper:2014-550 is not listed on IDEAS

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    More about this item

    Keywords

    trade; R&D; subsidies; welfare; process innovation;
    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
    • F15 - International Economics - - Trade - - - Economic Integration
    • 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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