Research and development, voluntary export restriction and tariffs

The effect of trade policy on domestic Research & Development (R&D) in oligopolistic markets is shown to depend on the nature of policy instruments: tariffs or non-tariff barriers. When the R&D investment has uncertain consequences on marginal cost, a voluntary export restriction (VER) decreases innovation by the domestic firm as compared to the free trade level. This result holds both under Cournot and Bertrand competition. A tariff increases R&D investment. It is a new rationale for Southern firms to prefer VER as a policy instrument, besides the well-known argument that it facilitates collusion. (C) 2001 Elsevier Science B.V. All rights reserved.