Innovation and Trade Policy in a Globalized World

79 Pages Posted: 23 Apr 2018 Last revised: 24 Jul 2023

See all articles by Ufuk Akcigit

Ufuk Akcigit

University of Chicago - Department of Economics; National Bureau of Economic Research (NBER); Center for Economic and Policy Research (CEPR)

Sina Ates

Board of Governors of the Federal Reserve System

Giammario Impullitti

University of Nottingham

Multiple version iconThere are 4 versions of this paper

Date Written: April 2018

Abstract

How do import tariffs and R&D subsidies help domestic firms compete globally? How do these policies affect aggregate growth and economic welfare? To answer these questions, we build a dynamic general equilibrium growth model where firm innovation endogenously determines the dynamics of technology, and, therefore, market leadership and trade flows, in a world with two large open economies at different stages of development. Firms’ R&D decisions are driven by (i) the defensive innovation motive, (ii) the expansionary innovation motive, and (iii) technology spillovers. The theoretical investigation illustrates that, statically, globalization (defined as reduced trade barriers) has ambiguous effects on welfare, while, dynamically, intensified globalization boosts domestic innovation through induced international competition. Accounting for transitional dynamics, we use our model for policy evaluation and compute optimal policies over different time horizons. The model suggests that the introduction of the Research and Experimentation Tax Credit in 1981 proves to be an effective policy response to foreign competition, generating substantial welfare gains in the long run. A counterfactual exercise shows that increasing tariffs as an alternative policy response improves domestic welfare only when the policymaker cares about the very short run, and only when introduced unilaterally. Tariffs generate large welfare losses in the medium and long run, or when there is retaliation by the foreign economy. Protectionist measures generate large dynamic losses by distorting the impact of openness on innovation incentives and productivity growth. Finally, our model predicts that a more globalized world entails less government intervention, thanks to innovation-stimulating effects of intensified international competition.

Suggested Citation

Akcigit, Ufuk and Ates, Sina and Impullitti, Giammario, Innovation and Trade Policy in a Globalized World (April 2018). NBER Working Paper No. w24543, Available at SSRN: https://ssrn.com/abstract=3167057

Ufuk Akcigit (Contact Author)

University of Chicago - Department of Economics ( email )

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National Bureau of Economic Research (NBER) ( email )

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Center for Economic and Policy Research (CEPR) ( email )

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Sina Ates

Board of Governors of the Federal Reserve System ( email )

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Washington, DC 20551
United States

Giammario Impullitti

University of Nottingham ( email )

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Nottingham, NG8 1BB
United Kingdom

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