R&D Subsidies and Foreign Direct Investment

We devise a model in which domestic firms do applied R&D, which can be subsidized by the government, and foreign firms with superior technology can enter in the domestic market. Foreign Direct Investment can act as a substitute of subsidies to improve domestic R&D, the share of domestic leading firms and consumption. Relatively closed economies may benefit from R&D subsidization while relatively open economies may not. For relatively low growth of the technological frontier, it is optimal to subsidize R&D and close the economy to foreign investment but the opposite happens for relatively high growth. Numerical simulations show the economy dynamics after policy experiments.