Strategic R&D Commitment and the Gains from Trade

This paper examines how trade liberalisation affects innovation, profits and welfare in a reciprocal markets model when firms pre-commit to R&D investment. First, we show that, for a range of trade costs, there are multiple equilibria, implying that the path of trade liberalisation is not unique. Second, welfare at “incipient” trade always exceeds welfare in autarky. Third, we show that, if the effectiveness of R&D is sufficiently high, trade always yields higher welfare than autarky. These new results suggests that when firms, operating in an oligopolistic environment, strategically precommit to R&D, the welfare gains from trade liberalisation are enhanced.