Macro Seminar

Giammario Impullitti

University of Nottingham


Seminar 3 – 14:30


This paper is motivated by two strong observations on the innovative activity in the US and the rest of the world: First, there is a clear convergence in the number of patents (and also citations) issued by US and non-US based firms over the course of the 1970s until the mid- 1980s. Second, in the first half of the 1980s, R&D subsidies and tax credits were introduced both at the federal and state level in the US and a halt of the technological convergence followed. In this paper, we ask the following questions: How sizable is this catch-up pattern that we observe? How detrimental is it for the US producer and consumers? Did R&D Tax Credit Policies of the 80s affect international technology competition? If yes, what have the welfare consequences of those policies been? We build a Schumpeterian endogenous growth model in which two countries compete over the leadership in different product lines where innovation decisions of firms depend on the technology gap between countries, a novel feature of our model. Another distinct feature of our work is that it introduces R&D tax credits into a structural model to study the effect of this policy on the global patterns of innovation. In the absence of policy intervention, the model is able to replicate the convergence observed in the data. Innovation policies help a country improve the quality in its product lines faster, but more importantly, it boosts the business stealing effect: firms in that country seize the leadership, and thus profits, of the product lines they operate in more frequently. The model allows us to separate and quantify the growth and business-stealing components of tax incentives to innovation on national welfare in the global economy. We compare innovation policy with another possible policy response to international competition, trade barriers. While increasing trade barriers would lead to welfare losses for the US, the observed innovation policy produces gains equivalent to an 8% increase in per capita consumption.

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