Effects of trade liberalization on growth and welfare through basic and applied researches

Abstract

This paper constructs a trade and growth model with firm heterogeneity, and basic and applied (technological) researches. It considers R&D activities of basic science conducted by the government using asset income tax and applied technology conducted by profit-maximizing firms to re-analyze the effect of trade liberalization on growth and welfare. It shows that trade liberalization elevates the growth rate, if the population size is small in an exogenous international spillover and endogenous growth model with firm heterogeneity. Moreover, it shows that the same condition is sufficient for welfare gain through further exposure to trade.