R&D Promotion with Footloose Production

We develop a model with a large R&D-intensive home firm that must decide whether to locate production domestically or to offshore it. Policymakers have an interest in the firm’s profits, the local external benefits generated... [ view full abstract ]

We develop a model with a large R&D-intensive home firm that must decide whether to locate production domestically or to offshore it. Policymakers have an interest in the firm’s profits, the local external benefits generated by the firm’s R&D and the employment provided by the domestic production facility. We demonstrate that attempts to boost the firm’s R&D can encourage the firm to offshore its production. Hence, we highlight a possible conflict between two policy objectives: encouraging local R&D and discouraging the offshoring of production. We extend the model to allow for footloose R&D.