R&D Subsidies and Economic Growth

This paper presents an endogenous growth model in which some firms devote resources to developing higher quality products (innovative R&D) and other firms devote resources to copying these products (imitative R&D). Although consumers benefit from the knowledge created by both types of R&D activities, only innovative R&D subsidies lead to faster economic growth and imitative R&D subsidies actually lead to slower economic growth. A key assumption driving these conclusions is that R&D activities are subject to decreasing returns. When R&D activities are subject to constant returns, as is commonly assumed, the only equilibrium with both innovation and imitation is unstable. JEL Classification Numbers: O32, O41. Mailing Address: Department of Economics, Michigan State University, East Lansing, MI 48824, U.S.A.