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Innovation union: Costs and benefits of innovation policy coordination

Author

Listed:
  • Teodora Borota
  • Fabrice Defever
  • Giammario Impullitti
Abstract
In this paper, we document large heterogeneity in innovation policy and performance between old and new EU member states, and present firm-level evidence on the close link between foreign direct investment (FDI) spillovers and eastern European firms' innovation. Guided by these facts and motivated by the pressing debate on further EU integration, we build a two-region endogenous growth model to analyse the gains from innovation policy cooperation in an economic union. The two regions, the West (the old members) and the East (the new post-2004 members), feature firms competing in innovation for market leadership, are integrated via free trade and costly technology transfer via FDI and have different innovation performance and policy. Calibrating the model to reproduce key features of the EU economy, we compare the outcomes of an East-West R&D subsidy war with a coop- eration scenario with unified subsidy across regions, and obtain three main results. First,we find that the dynamic gains spurring from the impact of cooperation on the economy's growth rate are sizable and substantially larger than the static gains obtained internalising the strategic motive for subsidies. Second, our model suggests that the presence of FDI and multinational production alleviates the strategic motive and increases the gains from cooperation. Third, separating FDI and innovation policy generates larger gains from cooperation, a policy complementarity driven by the knowledge spillovers carried by FDI.

Suggested Citation

  • Teodora Borota & Fabrice Defever & Giammario Impullitti, 2019. "Innovation union: Costs and benefits of innovation policy coordination," Discussion Papers 2019-14, University of Nottingham, GEP.
    • Handle: RePEc:not:notgep:2019-14
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    Cited by:

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    2. Cristiana Benedetti-Fasil & Giammario Impullitti & Omar Licandro & Petr Sedlacek, 2021. "Heterogeneous Firms, R&D Policies and the Long Shadow of Business Cycles," JRC Working Papers on Territorial Modelling and Analysis 2021-04, Joint Research Centre.
    3. Siedschlag, Iulia & Yan, Weijie, 2021. "Enhancing the attractiveness of the all-island economy to high-value sectors," Research Series, Economic and Social Research Institute (ESRI), number RS133.

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    More about this item

    Keywords

    Optimal innovation policy; growth theory; international policy coordination; EU integration; FDI spillovers.;
    All these keywords.

    JEL classification:

    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O38 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Government Policy
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

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