Research and development and trade policies for product innovation in the presence of foreign competition |
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| Institution: | 1. Harrisburg University of Science and Technology, USA;2. Department of Economics, Southern Illinois University Carbondale, USA;1. School of Business, East China University of Science and Technology, 130 Meilong Road, Shanghai 200237, China;2. Department of Finance, East China University of Science and Technology, Shanghai 200237, China;3. Department of Economics, University of Waterloo, 200 University Avenue West, Ontario, N2L 3G1, Canada;1. ESSCA School of Management, France;2. Institut Supérieur de Gestion, 2000, Le Bardo, University of Tunis, Tunisia;3. LAREQUAD FSEG de Tunis, University of Tunis El Manar, Tunisia;1. Department of Economics, Tunghai University, No. 1727, Sec. 4, Xitun Dist., Taiwan Boulevard, Taichung, 40704, Taiwan;2. Department of Accounting, Feng Chia University, Taiwan;1. Universidad de Zaragoza, Spain;2. Banco de España, Spain;1. Department of Economics, 364 FCBE, University of Memphis, Memphis, TN 38152, USA;2. Department of Economics, 432 FAB, University of Memphis, Memphis, TN 38152, USA |
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| Abstract: | This paper examines two policy instruments — a matching grant and import tariffs — for encouraging research and development (R&D) in product innovation by a domestic firm when it faces foreign competition. We do so by developing a theoretical model of product innovation where R&D effort is endogenous and its outcome uncertain. We examine the effects of a reduction in import tariffs on private expenditure on R&D, on public support for such R&D, and on total R&D expenditure. We find that in response to a reduction in import tariffs, the domestic firm always reduces its private R&D investments, but the total level of R&D expenditure (i.e., including public support) might go up depending on the level of tariffs. In particular, we find that it will go up if the initial level of tariff is higher than a critical level. When tariff is endogenous, we find that the socially optimal level of tariffs is positive. One finding that is of particular interest is that supporting private attempts to product innovate in the form of a matching grant program leads to a socially optimal level of product R&D. |
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| Keywords: | Product innovation R&D Matching subsidy Foreign competition Tariffs C72 F10 H32 O31 O38 |
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