Industrial Policy and Firm’s R&D Choice under Process and Product R&D

Abstract

This study clarifies how governments’ industrial policies affect the firm’s R&D choice when firms simultaneously conduct both cost-reducing process and quality-improving product R&D. We found the following results. Under Cournot competition, while output increases when quality improves and/or the production cost decreases, output decreases as the proportion of product R&D becomes higher compared to that of process R&D. Under Bertrand competition, whether prices become higher or lower depends on the degree of fraction of investment in two types of R&D. If firms only conduct one of the two kinds of R&D, this effect does not exist. A government always subsidizes its domestic firm’s R&D investments.