Patent Infringement and Strategic Trade Policies: R&D and Export Subsidies

Moonsung Kang
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Like the original Spencer-Brander result, the R&D incentives that we identify lead governments to set positive R&D subsides in the non-cooperative equilibrium. However, we find that if exporting governments could cooperate over their policy choices they would continue to subsidize R&D, rather than agreeing to tax R&D as in the original Spencer-Brander set-up. The reason is that under cooperation they will also agree to share perfectly the results of R&D investments (i.e., eliminate IPR protection), and R&D subsides are then required to maintain appropriate incentives for firms to engage in R&D investments. This last result is interesting for two reasons, both of which point to the importance of examining R&D subsides and IPR policies in tandem as we have done rather than in isolation as has heretofore typically been done. First, by this result we show that the case for strategic R&D subsides is more robust than previously thought, as it applies whether exporting governments are acting cooperatively or non-cooperatively, once their equilibrium choices of IPR protection are taken into account as well. And second, by this result we identify a puzzle as to why governments might wish to agree to jointly eliminate, rather than tighten, their levels of IPR protection, given that hey have at their disposal R&D outcomes. We show that the flavour of these findings extend as well to the case in which governments also have export policies at their disposal. In the original Spencer-Brander set-up, the addition of export policies leads governments to tax R&D and offer export subsides, pointing to another way in which the case for strategic R&D subsides appears to be fragile. But again out results imply that this fragility disappears in a setting in which the choice of IPR protection is modelled well.