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

Dermot Leahy and J. Peter Neary
Oxford Economic Papers
Vol. 51, No. 1, Symposium on Trade, Technology, and Growth (Jan., 1999), pp. 40-59
Published by: Oxford University Press
Stable URL: http://www.jstor.org/stable/3488591
Page Count: 20
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R&D; Spillovers and the Case for Industrial Policy in an Open Economy
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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-internalises 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.

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