International asymmetric R&D rivalry and industrial strategy

This study models an international duopoly under "asymmetrical" R&D investment rivalry, in which a firm from a cost-reducing country (CRC) conducts process R&D investment, a firm from a quality-improving country (QIC) makes product R&D investment, and the governments in the respective countries implement R&D policies for their own firms. We analyze the relationship between firms' R&D investment-price decisions and governments' R&D policies. We find that an increase in the process (product) R&D investment subsidy of the CRC (QIC) raises the process (product) R&D investment of its firm, but reduces the product (process) R&D investment of its rival firm, and vice versa. We also show that, while an increase in the process (product) R&D investment of the CRC's (QIC's) firm increases its output, it decreases its rival's output, and vice versa. Furthermore, we demonstrate that, while an increase in the process R&D investment of the CRC's firm reduces the prices of both firms, an increase in the product R&D investment of the QIC's firm raises its own price, but reduces its rival's, and vice versa. Finally, we find that the optimal R&D investment policies of both countries are subsidy policies, when their firms act under asymmetrical R&D investment rivalry.