Government Subsidy Strategy for Innovative Drug RD Based on the Inter-Firm Spillovers

Abstract

Government subsidies can supplement RD investment within pharmaceutical firms and strengthen industry knowledge spillovers effectively. Based on the inter-firm spillovers, a differential game model is established to investigate the government subsidy strategies under the different innovative drug RD strategies of pharmaceutical firms. With the Hamilton-Jacobi-Bellman equitation, the optimal RD investment, the pharmaceutical technical levels, and the optimal benefits are obtained under the strategies of no pharmaceutical firms conduct RD innovation, one side innovates alone and RD cooperation. It can be concluded that the RD investment of pharmaceutical firms and the effort level of the government is positively related to the technical level and their comprehensive benefits, while it is a negative correlation to the cost coefficient. In addition, an increase in spillover coefficient produces an increase in government subsidy. Furthermore, when the spillovers are low, the government should give a higher subsidy to the strategy of RD cooperation. As the spillovers increase, the government should allocate more subsidies to pharmaceutical firm who conduct independent RD of innovative drugs.