Policy on international R+D cooperation: subsidy or tax?

Abstract

In this paper we derive the non-cooperative, optimal policy towards international R+D cooperation. Two types of R+D cooperation are considered: collaboration and coordination. When firms cooperate, the familiar strategic behavior, which prevails in R+D competition, is reduced, or eliminated, or even completely reversed. However, we prove that R+D subsidy is still an optimal policy for individual governments in the case of R+D coordination and, more strikingly, the subsidies are larger for higher degrees of coordination. Government policies do not help the firms to commit. In the case of R+D collaboration, both R+D subsidy and tax are possible. With linear demands, however, tax is never optimal; moreover, we show that the optimal policy is subsidy regardless of the strategic nature (substitute or complement) of the strategy variables, a result that contradicts the traditional wisdom.