Working Paper: CEPR ID: DP1671
Authors: Dermot Leahy; J. Peter Neary
Abstract: In this paper we consider the case for subsidies towards firms which generate R&D spillovers in open economies. We show that in the presence of strategic behaviour by firms many expected results are overturned. Local R&D spillovers to other domestic firms may justify an R&D tax rather than a subsidy; R&D cooperation by local firms over-internalizes the externality and also justifies an R&D tax; and international spillovers which benefit foreign firms may justify a subsidy, even though the government cares only about the profits of home firms.
Keywords: R&D spillovers; industrial policy; strategic trade policy
JEL Codes: F12; L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Local R&D spillovers (O39) | lower marginal production costs for other domestic firms (L11) |
| International R&D spillovers benefiting foreign firms (O36) | domestic firm benefits (F23) |
| Strategic behavior by firms (L13) | socially wasteful overinvestment in R&D (O35) |
| Government intervention (O25) | offset inefficiency from strategic behavior (D61) |