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R&D SUBSIDIES, INTERNATIONAL KNOWLEDGE DIFFUSION, AND FULLY ENDOGENOUS PRODUCTIVITY GROWTH

Published online by Cambridge University Press:  11 June 2014

Colin Davis  and
Ken-ichi Hashimoto
Colin Davis*
Affiliation:
Doshisha University
Ken-ichi Hashimoto
Affiliation:
Kobe University
*
Address correspondence to: Colin Davis, the Institute for the Liberal Arts, Doshisha University, Karasuma Higashi, Imadegawa, Kamigyo, Kyoto, 602-8580, Japan; email: [email protected].
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Abstract

This paper investigates the effects of R&D subsidies on aggregate product variety and endogenous productivity growth without scale effects. In a two-country model with imperfect knowledge diffusion, the larger country has a greater share of firms with higher productivity levels. The concentration of relatively productive firms increases knowledge flows between firms, causing an increase in firm-level employment in innovation. Accordingly, the aggregate growth rate is higher when counties are asymmetric than when they are similar in size. The larger scale of firm-level innovation activity reduces market entry, however, and aggregate product variety falls. In this framework, national R&D subsidies have positive effects on the industry share, relative productivity, and wage rate of the implementing country. If the smaller country introduces an R&D subsidy, aggregate product variety rises and productivity growth falls. If the larger country introduces an R&D subsidy, productivity growth rises, but aggregate product variety may rise or fall.

Keywords

R&D SubsidyKnowledge DiffusionProductivity GrowthScale Effect
Type
Articles
Information
Macroeconomic Dynamics , Volume 19 , Issue 8 , December 2015 , pp. 1816 - 1838
Copyright
Copyright © Cambridge University Press 2014 

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