R&D Subsidies and Multinational Firm Ownership

Most industrialized countries subsidize private sector R&D, even under some circumstances when the firm is owned by foreigners. The present paper, using a simple theoretical analysis of a monopoly firm selling only to the U.S. market, argues that such subsidies are welfare enhancing—as long, of course—as the funding agency chooses the projects it funds wisely. The paper suggests that a subsidy rate of 50% might be warranted under some circumstances.