R&D spillovers and the case for industrial policy in an open economy

Abstract

In this paper we consider the case for subsidies towards rms which generate R&D spillovers in open economies. We show that in the presence of strategic behaviour by rms many expected results are overturned. Local R&D spillovers to other domestic rms may justify an R&D tax rather than a subsidy; R&D cooperation by local rms over-internalises the externality and also justies an R&D tax; and international spillovers which benet foreign rms may justify a subsidy, even though the government cares only about the prots of home rms.