DP1671 R&D Spillovers and the Case for Industrial Policy in an Open Economy

Author(s):	Dermot Leahy, J Peter Neary
Publication Date:	July 1997
Keyword(s):	Industrial Policy, R&D Spillovers, StrategicTrade Policy
JEL(s):	F12, L13
Programme Areas:	International Trade and Regional Economics
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=1671

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.