Subsidy and entry: The role of licensing

Abstract

The strategic trade literature has mainly examined the importance of per-unit subsidies or taxes. Unlike the earlier works, a fixed amount of subsidy has been considered in this paper. This paper shows that even if this subsidy policy does not affect the marginal calculations of the firms, this policy can significantly alter other incentives of the firms. A commitment to the subsidy policy can encourage the foreign firm to license its technology to the domestic firm which, in turn, helps to increase the welfare of the domestic country. We find that, in equilibrium, the government of the domestic country does not need to provide the subsidy. We have also analyzed the role of the foreign government.