Accessible Unlicensed Requires Authentication Published by De Gruyter July 26, 2011

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

Brita Bye, Taran Faehn and Leo A. Grünfeld

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.

Published Online: 2011-7-26

©2011 Walter de Gruyter GmbH & Co. KG, Berlin/Boston