We evaluate the sensitivity of the case for an R&D subsidy in an
export sector when the outcome of R&D is uncertain and when the resulting
product market is oligopolistic. Investments in R&D are assumed to induce
either first order or mean-preserving second order shifts in the
distribution of a firm's costs, with firms then competing in either prices
or quantities in the product market. When R&D reduces the mean of a
firm's cost distribution in the particular sense of first order stochastic
dominance, we find using standard models of product market competition that
a national strategic basis for R&D subsidies exists, whether firms choose
prices or quantities. This national strategic incentive to subsidize R&D
must be balanced against the national corrective incentive to tax R&D that
arises whenever the number of domestic firms exceeds one. However, when R &
D preserves the mean but alters the riskiness of a firm's cost distribution
in the sense of second order stochastic dominance, we find that the national
strategic basis for R&D intervention completely disappears, while the
national corrective incentive is now to subsidize R&D whenever the number
of domestic firms exceeds one. We conclude that the crucial determinant of
appropriate R&D policy is the nature of the R&D process itself.
*Published:
Journal of International Economics, February 1994
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