Strategic Research and Development Policy: Societal Objectives and the Corporate Welfare Argument

Abstract

"The article considers the optimal research and development subsidy regime in a two-firm two-country model where each firm is "located" in a specific country. Trade is intra-industry in that customers in both countries purchase from both firms. The article suggests that when both countries subsidize their local firm usually welfare increases compared to the case of zero subsidies. Making the same comparison, profit always falls in the symmetric game and falls about half the time in the asymmetric game. These results call into question some common notions about corporate welfare. "("JEL "O38, H25, F23) Copyright (c) 2008 Western Economic Association International.

R&D subsidy games: a cost sharing approach vs. reward for performance

“…Perhaps less familiar are the home ownership and spillover parameters as found in Gretz et al (2009). The home ownership parameter is straightforward: 0 B h i B 1.…”

“…In any event, both structures are found in the R&D subsidy game literature. Gretz et al (2009), Liao (2007), and Kujal and Ruiz (2009) consider the cost sharing structure. Kind (2006, 2008), Kang (2006Kang ( , 2008, and DeCourcy (2005) consider the reward for performance structure.…”

“…The formal assumptions of the paper follow those of Gretz et al (2009), Haaland and Kind (2006), and DeCourcy (2005. A two-country two-firm intra-industry trade model is used; the formal game has three stages: first, governments announce their policies, then firms decide their R&D spending, and finally Cournot-quantities are determined.…”

“…(In all of these papers the R&D function is quadratic as it is in the present paper.) The primary focus of Gretz et al (2009) is on optimal subsidy rates and funding priorities; Kind (2006, 2008) compare cooperative and non-cooperative R&D subsidy games and focus on product differentiation and trade costs, while DeCourcy (2005) compares a subsidy game to research joint ventures. A closely related literature assumes two countries (one firm per Footnote 1 continued services.''…”

“…This is one of the few papers to do a large scale simulation like that found in the present paper. Other references can be found in Gretz et al (2009) andTassey (2005). Finally, there is also an extensive empirical literature on R&D subsidy programs, see , Berube and Mohnen (2009), Gonzalez and Pazo (2008), Czarnitzki and Toole (2007), and Link (2006) to mention just a few recent examples.…”