Date of Award

8-1-2012

Degree Name

Doctor of Philosophy

Department

Economics

First Advisor

Lahiri, Sajal

Abstract

This research investigates the roles of competition, trade policies, and credits as factors affecting innovation and offers theoretical and empirical analysis to study the interrelationships between these variables. In the theoretical parts, we develop a number of predictions. To test these predictions, this study uses Turkish firm-level data from Business Environment and Enterprise Performance Surveys (BEEPS 2002, 2005), conducted by the European Bank for Reconstruction and Development (EBRD) \& World Bank. This dissertation develops three different oligopoly models in three chapters which are explained below. All three models adapt the well-known Grossman and Helpman (1993) quality ladder model of R\&D process, which is indeterministic in nature. Chapter 1 considers the effect of the intensity of competition on the incentives to innovate for identical firms competing in a Cournot oligopolistic market. In this framework, we examine the impact of an increase in competition on R&D activities among others. We find an inverted-U shaped relationship between competition and R\&D effort. Chapter 2 analyzes firms' investment on R&D in an imperfectly competitive setting. The focus is on cost asymmetries in a duopoly model. The baseline model setting assumes firms invest in a quality ladder type of R&D process with probabilistic returns and have to borrow both at the innovation stage and the production stage. We find that if the firm is more efficient than the rival, effort on R\&D will decrease less upon facing a common interest rate. Chapter 3 extends the ``reciprocal dumping'' model of Brander and Krugman (1983) by introducing a quality ladder type of product innovation. In this new framework, we show that tariffs increase the effort to innovate for home firms, while it decreases the effort on R\&D for foreign firms. Furthermore, we analyze the effects of domestic tariffs on domestic welfare. Domestic welfare increases only if the benefits from increasing R\&D effort of the domestic firm can sufficiently cover for the decreasing R\&D effort on Foreign's exports.

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