Virtually all industrialized nations encourage greater investment in research and development (R&D) by the private sector; in some cases the government actually shares some R&D costs of private firms. (1) One such program in the United States is the Advanced Technology Program (ATP) at the National Institute of Standards and Technology. While the benefits to ATP programs have been documented in the professional literature (e.g., Darby, Zucker, and Wang, 2004; Link, 2006; Tassey, 2005), the resistance to such programs in general, and ATP specifically, makes sensational headlines and Congressional Testimony. Carnahan (2005) in a recent Forbes.com article claims that "the notion of government-led industrial and technological development has been widely discredited." There has been public backlash against programs like ATP claiming that they are little more than corporate welfare. (2) Moore (1997) of the Cato Institute, in testimony before a U.S. Senate subcommittee, (3) cites ATP as the most egregious example of corporate welfare. His argument concerns the efficiency of capital markets as:
the very essence of our modern-day capitalist system. The underlying
theology of the ATP is that government can identify companies and
emerging technologies that warrant capital financing better than the
proven experts in the financial markets can (Moore, 1997).
The problem with this reasoning, in our view, is that Cato has a myopic view of societal benefits. It may well be that venture capitalists can identify companies and technologies that maximize profits, but there are other components of the government's objective function. Just as importantly, this view does not take into account industries characterized by intra-industry international competition. The results of this article suggest that in a two-country world, the home country benefits by subsidizing its domestic firm both when the away country does not subsidize and when it does. Thus, what we call the "Dual" subsidy regime, when both countries subsidize their local firm, is the Nash equilibrium of the subsidy game.
The question of whether these equilibrium subsidies constitute corporate welfare hinges on whether the governments' objective function (i.e., social surplus, the sum of consumer surplus, profits, other domestic benefits, minus the cost of the subsidy) increases or decreases as compared to the "Base" case of no subsidies at all. An R&D subsidy is corporate welfare if it causes social surplus to decrease and it is not corporate welfare if it causes social surplus to increase. The results of this article suggest that although it is possible that social surplus decreases, comparing Dual equilibrium to Base, that result is highly unlikely. In the majority of cases, for an industry characterized by intra-industry international trade, R&D subsidies increase social surplus relative to the case of no subsidies. Our results further suggest that, making the same comparison, firm profits may well fall: they always fall in a symmetric world, they fall about half the time in an asymmetric world, and on average profits fall slightly. To label all R&D subsidies corporate welfare might strike the firm whose profit is lower in the Nash equilibrium as more than slightly ironic.
Crucial to the relevance of the present article is the fact that other countries do in fact subsidize private sector R&D, but such programs are not hard to find. "Technology Partnerships Canada," the "Framework Program" in the European Union (EU), "Tekes" in Finland, "Teiankobo" in Japan, and the "Link Scheme" in the United Kingdom are just a few examples (Chang, 1998; Haaland and Kind, 2006). Neither is it hard to find examples where ATP funds projects for U.S. firms, the funding agency in another country funds the U.S. firm's foreign competitor, and both firms are being funded for similar technologies.
For example, the EU's Framework Program has awarded grants to EU firms in the photonics industry since Framework's inception in 1984. …