Trade liberalization, technology transfer, and endogenous R&D

Abstract

It is generally believed that trade liberalization impedes technology transfers from abroad. By considering R&D behaviour of the foreign firm, this paper shows contrarily that trade liberalization has a positive effect on the foreign firm’s R&D, resulting in a better technology to be transferred to the domestic firm and enhancing both the domestic and the world welfare. This result holds even if trade liberalization originates from non-tariff barriers such as quotas. Moreover, by comparing the levels of technology transfer between the two regimes, we find that if the trade barrier is high (low), the technology transferred from the foreign firm under the equivalent quota regime is superior (inferior) to that under the tariff regime. Finally, a ban on technology export by the foreign country may surprisingly induce the foreign firm to invest more in its R&D.