R&D Subsidy and Tax Policy on International Product R&D with Spillovers

This paper analyzes the equilibrium levels of R&D subsidies or taxes from a noncooperative product R&D policy game in two cases in which firms are monopolies in their own market segments and they compete in international markets with imperfectly substitutable goods. Furthermore, we also examine the equilibrium level of an R&D subsidy or tax from a cooperative product R&D policy game in the case that the two goods are imperfect substitutes. We use an international duopoly model in which two firms produce differentiated products and compete in a third country’s market. It is shown in a symmetric equilibrium that (i) a government’s optimal level of R&D subsidy is positive for positive R&D spillovers and zero for no R&D spillovers if the firms are monopolies in their own market segments; (ii) a government’s optimal policy is R&D subsidies for relatively high R&D spillovers and more differentiated goods and R&D taxes for relatively low R&D spillovers and less differentiated goods if the firms compete in an international market with imperfect substitutes; and (iii) a government’s optimal level of R&D subsidy or tax in harmonized R&D subsidy or tax is the same as one in the international R&D policy competition case.