Empirical evidence strongly suggests that R&D increases a firm’s "absorptive capacity" (its ability to absorb spillovers from other firms) as well as contributing directly to profitability. We explore the theoretical implications of this. We specify a general model of the absorptive capacity...

This paper reviews the theory of foreign direct investment (FDI), focusing on an apparent conflict between theory and recent trends in the globalized world. The bulk of FDI is horizontal rather than vertical, but horizontal FDI is discouraged when trade costs fall. This seems to conflict with...

This paper presents a general result for simultaneous reform of tariffs and quotas in a small open economy, where some of the quota rents do not accrue to domestic residents. Absent highly perverse income effects, welfare must rise following a uniform proportionate reduction in tariffs and a...

I review briefly the empirical evidence in the trade and wages debate, which overwhelmingly rejects the Heckscher-Ohlin explanation for recent increases in OECD skill premia. I then argue that the same evidence is also difficult to reconcile in general equilibrium with the view that exogenous...

The authors consider the free-market and socially optimal outcomes in a general oligopoly model with many firms which first engage in R&D and then compete in either output or price. Strategic behavior by firms tends to reduce output, R&D, and welfare and so justifies higher subsidies except when...

Empirical evidence strongly suggests that R&D increases a firm’s ‘absorptive capacity’ (its ability to absorb spillovers from other firms) as well as contributing directly to profitability. We explore the theoretical implications of this. We specify a general model of the absorptive...

This paper examines the free-market and socially-optimal outcomes in a dynamic oligopoly model with R&D spillovers. First-best optimal subsidies to R&D are higher when firms play strategically against each other, but lower when they cooperate on R&D (at least with high spillovers) and when they...

In this paper we develop techniques for measuring the trade policy equivalent of domestic distortions, using a distance function approach. Our measure, the Trade Restrictiveness Index, is shown to equal the uniform tariff which is welfare-equivalent to a given pattern of domestic taxes and...