R&D Subsidies and Multi-product Firms

We analyze firm subsidies directed at the fixed costs of developing new products in a setting with international trade and multiproduct heterogeneous firms that can move between countries. Socially optimal unilateral subsidies balance the welfare gains from increased variety against taxes. Freer trade implies lower optimal unilateral subsidies as more of the benefits spill over to foreign consumers. For similar reasons, the simulated Nash subsidies will be lower with lower trade costs. This is consistent with the current situation in the world economy, where trade protection and higher subsidies seem to go hand in hand.