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The B.E. Journal of Economic Analysis & Policy

Editor-in-Chief: Jürges, Hendrik / Ludwig, Sandra

Ed. by Auriol , Emmanuelle / Brunner, Johann / Fleck, Robert / Friebel, Guido / Requate, Till / Tsui, Kevin / Wichardt, Philipp / Zulehner, Christine

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Growth and Innovation Policy in a Small, Open Economy: Should You Stimulate Domestic R&D or Exports?

Brita Bye1 / Taran Faehn2 / Leo A. Grünfeld3

1Statistics Norway,

2Statistics Norway,

3Menon Business Economics,

Citation Information: The B.E. Journal of Economic Analysis & Policy. Volume 11, Issue 1, ISSN (Online) 1935-1682, DOI: 10.2202/1935-1682.2601, July 2011

Publication History

Published Online:
2011-07-26

This article offers supplementary material which is provided at the end of the article.

Abstract

In small and open economies, absorption of foreign knowledge through international trade often plays a more important role for domestic innovation and growth than investment in domestic R&D. This suggests that trade policies can increase knowledge spillovers from abroad. Public support to R&D can be motivated both by positive internal knowledge externalities and by its ability to expand absorptive capacity. This dynamic, empirical, general equilibrium analysis models these interplays between R&D, trade and productivity. It compares public R&D support and export promotion of R&D based products with respect to long term growth and welfare impacts. We find that export promotion is inferior to R&D support in spurring R&D. However, it is not outperformed in terms of welfare generation. The reason is that existing and politically persistent policy interventions create inefficiencies that can be counteracted by R&D-based export promotion as a second-best policy.

Keywords: absorptive capacity; computable general equilibrium (CGE) model; endogenous growth; research and development; international spillovers

Supplementary Article Materials

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