Working Paper: NBER ID: w24543
Authors: Ufuk Akcigit; Sina T. Ates; Giammario Impullitti
Abstract: How do import tariffs and R&D subsidies help domestic firms compete globally? How do these policies affect aggregate growth and economic welfare? To answer these questions, we build a dynamic general equilibrium growth model where firm innovation endogenously determines the dynamics of technology, and, therefore, market leadership and trade flows, in a world with two large open economies at different stages of development. Firms’ R&D decisions are driven by (i) the defensive innovation motive, (ii) the expansionary innovation motive, and (iii) technology spillovers. The theoretical investigation illustrates that, statically, globalization (defined as reduced trade barriers) has ambiguous effects on welfare, while, dynamically, intensified globalization boosts domestic innovation through induced international competition. Accounting for transitional dynamics, we use our model for policy evaluation and compute optimal policies over different time horizons. The model suggests that the introduction of the Research and Experimentation Tax Credit in 1981 proves to be an effective policy response to foreign competition, generating substantial welfare gains in the long run. A counterfactual exercise shows that increasing tariffs as an alternative policy response improves domestic welfare only when the policymaker cares about the very short run, and only when introduced unilaterally. Tariffs generate large welfare losses in the medium and long run, or when there is retaliation by the foreign economy. Protectionist measures generate large dynamic losses by distorting the impact of openness on innovation incentives and productivity growth. Finally, our model predicts that a more globalized world entails less government intervention, thanks to innovation-stimulating effects of intensified international competition.
Keywords: Innovation; Trade Policy; R&D Subsidies; Tariffs; Economic Welfare
JEL Codes: F13; O4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| R&D subsidies (O38) | domestic firms' competitiveness (F23) |
| R&D subsidies (O38) | increased innovation (O35) |
| R&D subsidies (O38) | productivity growth (O49) |
| R&D tax credit introduction in 1981 (O32) | long-term welfare gains (D69) |
| unilateral tariff increases (F13) | short-term welfare gains (D69) |
| unilateral tariff increases (F13) | long-run welfare losses (D69) |
| unilateral tariff increases (F13) | reduced innovation incentives (O39) |
| unilateral tariff increases (F13) | potential retaliation from foreign economies (F69) |
| protectionist measures (F13) | distort impact of openness on innovation (O36) |
| globalization (F60) | reduced need for government intervention (H10) |
| intensified competition (L13) | fosters innovation (O36) |