INTERNATIONAL R-AND-D COMPETITION AND TRADE-POLICY

R&D is modelled as a costly random draw from a set of technologies for producing a homogeneous good. It is shown that free trade stimulates R&D as compared to autarky by increasing competition and the market size, both leading to higher expected returns to R&D. If the technological gap is too wide, however, socially beneficial R&D may be discouraged in the technologically inferior country. In this case complete protection can be better than free trade, but it is inferior to other policies like tariffs or, in particular, direct subsidies to R&D. © 1990.