International R&D Collaboration and Strategic Trade Policy

• Author: Xiaolin Qian,Huasheng Song,Baomin Dong
• Published date: 01 February 2016
• Date: 01 February 2016
• DOI: http://doi.org/10.1111/rode.12201

International R&D Collaboration and Strategic

Trade Policy

Baomin Dong, Huasheng Song, and Xiaolin Qian*

Abstract

We study an international trade model with symmetric countries and symmetric firms, with countries

making strategic trade policies, anticipating the decisions of firms on R&D collaboration at the subsequent

stage. In general we should observe a conflict between the equilibrium outcome and the efficient one. We

find that an asymmetric outcome where one country unilaterally liberalizes trade while the other does not

is likely to occur. We also find that while banning international R&D collaboration may help to reach free

trade equilibrium in certain situations, it provides little assistance in reaching the outcome that maximizes

global welfare.

1. Introduction

Nowadays, as technologies have become more complex and the pace of the innova-

tion process has accelerated, collaboration has clearly become the preferred option

for companies’ research and development (R&D) consideration (Nummela, 2003).

Indeed, many markets are characterized by a high level of inter-firm collaboration in

R&D activity and a significant proportion of such collaboration takes place in the

international context.

It is also well recognized that the presence of oligopolistic competition implies that

economic profits are not driven to zero, this means that government policies that shift

the industrial equilibrium to the advantage of domestic firms may be socially benefi-

cial from a national perspective. This leads to the central game-theoretical insight of

strategic trade policies and industrial policies: intervention that alters the strategic

interaction between oligopolistic firms can itself be an important basis for trade and

industrial policy. Through these policies, governments influence the behavior of

domestic firms in their subsequent strategic interaction with foreign rivals.

In this paper we address the following questions. (1) How are the incentives for

firms to invest and collaborate in R&D altered when the governments choose the

optimal trade policies? What is the equilibrium structure of R&D collaboration and

trade regimes? (2) Are individual incentives of firms to form international R&D col-

laboration and individual incentives of governments to liberalize trade adequate from

a social welfare point of view?

To answer these questions we develop a four-stage game and examine the structure

of R&D collaborations and strategic trade policies that emerge in this context. We

* Song (corresponding author): School of Economics and CRPE, Zhejiang University, Zheda Rd. 38,

Hangzhou, 310027, China. Tel/Fax: 0086-571-87952835; E-mail: songzju@zju.edu.cn. Dong: School of Eco-

nomics, Henan University, Kaifeng, Henan, China, 475000. Qian: Faculty of Business Administration, Uni-

versity of Macau, E22, Avenida da Universidade, Taipa, Macau, China. The authors wish to thank an

anonymous referee for his/her comments that helped improve the paper. Research supports from National

Science Fund of China (71573230), Chinese Ministry of Education (10JJD790030), Hengyi Foundation at

ZhejiangUniversity are gratefully acknowledged. All errors remain those of the authors.

Review of Development Economics, 20(1), 250–260, 2016

DOI:10.1111/rode.12201

©2015 John Wiley & Sons Ltd