Abstract

This paper analyzes firm subsidies directed at the fixed costs of developing new products in a theory with international trade and multiproduct heterogeneous firms that can move between countries. Socially optimal unilateral subsidies balance welfare gains from more variety against taxes. Freer trade implies lower optimal unilateral subsidies as more of the benefits "spillover" to foreign consumers. The Nash subsidies will be for similar reasons be lower for lower trade costs. This is consistent with the present situation in the world economy where trade protection and higher subsidies seem to go hand in hand in the recent period.