R&d Cooperation, Innovation Spillovers and Firm Location in a Model of Environmental Policy

In this paper, the reaction of firms to the introduction of environmental charges in a given industry is analysed. Firms may decide either to relocate their plants abroad or to adopt a new environmental-friendly technology. The latter can be either developed by investing in R&D or obtained by buying a licence. We show that, even if domestic firms share the same initial technology, at the equilibrium they make different choices in response to the same environmental policy. Some firms decide to cooperate in carrying out environmental R&D, other firms re-locate their plants abroad, and a third group decides to innovate through imitation. The size of the three groups can be affected by the government's industrial, trade and environmental policies. * University of Venice, CEPR, FEEM and GRETA. E-mail: [email protected] ** University of Aix-Marseille II and GREQAM. E-mail: [email protected] Revised for publication in E. Petrakis, E. Sartzetakis and A Xepapadeas, eds., Environmental Regulation and Market Structure, E. Elgar: Cheltenham. A previous version of this paper was presented at the first meeting of the EU-DGXII Network on "Environmental Policy and Technological Innovation", Venice, 11.5.1995, at the EARIE Annual Conference, Juans Les Pins, 3-6.9.1995 and at the UAB-GREQAM-FEEM Workshop on "International Trade and Imperfect Competition", Barcelona, 5-7.10.1995. The Authors are grateful to Anastasios Xepapadeas, Jeroen Van den Bergh, Pedro Barros, and to the participants to the above conferences and workshops for many helpful comments and suggestions. Financial support from the DGXII Environment Programme is gratefully acknowledged. May 1995. Revised: November 1997 R&D COOPERATION, INNOVATION SPILLOVERS AND FIRM LOCATION IN A MODEL OF ENVIRONMENTAL POLICY