Optimal Technology Subsidies vs Export Subsidies: A Strategic Approach

Abstract

National governments, especially in developing countries, play a key role in certain international industries, particularly those high technology and high investment industries. By endogenizing the firm's technology choice, this paper has developed a strategic approach to examine the economic effects of technology subsidy and/or export subsidy on the technology and output decisions. The main findings of this paper are as follows: (1) If the domestic government can prescribe only one policy to improve its competitiveness in the international market, then export subsidy is superior to technology subsidy. (2) It does not matter whether the technology and export subsidies are implemented simultaneously or sequentially — both policies can lead to the first-best solution: cost minimization in the technology choice and Stackelberg leader position in the export market. (3) To reach the cost-minimizing technology level, the tax revenue required is higher under sequential than that under simultaneous policy implementation.