We characterize the strategic and corrective role for R&D subsidies
in an export market where R&D is an uncertain process and where the winner
of the R&D competition monopolizes the market. Investments in R&D are
assumed to induce either first order or mean-preserving second order shifts
in the distribution of (i) a firm's costs, with the low cost firm then
monopolizing the product market or, under a reinterpretation of the model,
(ii) a firm's discovery dates, with the first firm to make the discovery
enjoying patent protection of infinite duration. We show that, regardless
of which form uncertainty takes in the R&D process, a national strategic
incentive to subsidize R&D exists, but must be balanced against a national
corrective incentive to tax R&D whenever a country has more than one firm
involved in the R&D competition. We conclude that an R&D subsidy is
likely to be attractive in markets where scale economies are sufficiently
large that firms battle for the eventual monopoly position, provided only
that the number of domestic firms involved in the R&D stage is low.
*Published:
International Economic Review, November 1992
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