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

Abstract

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