Trade policy mix: IPR protection and R&D subsidies

This paper analyses strategic R&D policy under circumstances where intellectual property rights protection resulting from firms' R&D investment is not perfect. By examining policy choices wherein a government chooses both R&D subsidies and IPR protection levels simultaneously, we show that it is optimal for a government to adopt sufficiently weak IPR protection and to subsidize R&D investments of domestic firms. Inducing R&D investment of foreign rival firms will increase the profits of domestic firms.