International licensing and R&D subsidy

R&D rivalry and optimal R&D policies are investigated in an asymmetric four-stage game that involves international licensing. It is found that a government’s R&D policy crucially depends on its domestic firm’s bargaining power over the licensing gain. When the firm’s bargaining power is greater than one half, the government subsidizes its home firm’s R&D investment, while imposes a tax if the firm’s bargaining power is less than one half. Additionally, this result does not depend on the status of the firm (the licensor or the licensee). Finally, the effects of two different licensing contracts (fixedfee v.s. royalty per unit) on governments’ optimal R&D policies are investigated.