Proteccionism under RD Policy Innovation Rate and Welfare.pdfVIP

ECONOMICS ISCTE Working Paper- RESEARCH CENTER Lisbon University Institute Proteccionism under RD Policy: Innovation Rate and Welfare Felipa de Mello-Sampayo Sofia de Sousa-Vale Francisco Camões Orlando Gomes ISCTE - Lisbon University Institute UNIDE - ECR AV FORÇAS ARMADAS 1649-126 LISBON-PORTUGAL http://erc.unide.iscte.pt Working Paper - 02/10 Proteccionism under RD Policy: Innovation Rate and Welfare ∗ † † † Felipa de Mello-Sampayo , Sofia de Sousa-Vale , Francisco Cam˜oes and Orlando Gomes‡ † ISCTE - IUL University Institute of Lisbon ‡ ESCS - IPL Polytechnic Institute of Lisbon Abstract The pressure from national lobbies may lead governments to shift from an optimal into a non-optimal innovation policy. This paper examines the growth and welfare effects of optimal and non-optimal innovation policies. The non-optimal policy corresponds to a subsidy for national innovators that is equivalent to an optimal policy of incentives (tax cuts) to foreign investors. Since we are assessing what can nationals do with the support that could be oriented to foreign firms, we are measuring what the economy loses for not supporting foreign firms. We find welfare loss when supporting national RD instead of foreign RD. We conclude that the same support given to innovation can produce