R&D Subsidies: A Law & Economics Analysis of Regional and International Rules

Abstract

This paper addresses the question of what the current international legal systems concerning subsidies for innovation are and whether these fit the findings of economic analysis. Innovation is a very relevant economic instrument toward increasing the commercial and political competitiveness of companies and national states. However, investments which aim at achieving innovation may not be undertaken on a socially optimal level by private firms. This is because the social benefits of newly produced knowledge can exceed those that private investors in innovation might be able to individually enjoy. According to some scholars, this should be regarded as a market failure and would justify the use of public financial support as a means of inducing the socially optimal level of innovation by private firms. On the regional and international level, however, innovation subsidies might, as other kinds of subsidies, negatively impact industries located in third states, leading to economic and political tensions. To deal with these conflicts, states have agreed upon regional and international provisions to regulate the concession of subsidies. Some of these legal frameworks explicitly mention innovation subsidies, recognizing them as a particular type of financial support. The objective of this paper is to identify the existence or non-existence of rules concerning subsidies in specific regional and international legal systems (WTO, EU, NAFTA and MERCOSUR), with special attention devoted to rules for innovation subsidies and to confront these with the findings of economic analysis.