Trade Liberalisation and Optimal R&D Policies in a Model of Exporting Firms Conducting Process Innovation

URL des Documents de travail : http://ces.univ-paris1.fr/cesdp/cesdp2016.htmlDocuments de travail du Centre d'Economie de la Sorbonne 2016.28 - ISSN 1955-611XThis paper discusses the impact of trade liberalisation and R&D policies on exporting firms' incentive to innovate and social welfare. Key factors determining the government's optimal policy are the strength of R&D spillover effect and the toughness of firm competition. When firms only compete in an overseas market, the optimal policy is to tax R&D. Trade liberalisation in the overseas market induces a higher R&D tax rate to be imposed on firms. When firms also conduct business in the home market, the government should financially support firms' R&D. Trade liberalisation always increases firms' output sales, R&D investments, and social welfare