Subsidies, Entry and the Distribution of R&D Investment

We analyze the link between entry and Ramp;D spending distribution. We consider a monopolistic competitive market with free entry in which firms can invest in cost-cutting Ramp;D by paying a fixed cost first. For an intermediate level of fixed cost, there is a unique equilibrium in which the market segments into investing and non-investing firms. We show that the measure of Ramp;D investing firms decreases as entry occurs. Using this result, we show how alternative government policies affect the Ramp;D spending distribution. In particular, we characterize the cases in which incentives to promote Ramp;D spending can result in exit. We show that while subsidy to entry may be welfare neutral from the consumers' point of view, Ramp;D subsidies, despite promoting exit sometimes, are always welfare improving. Data motivating these results are drawn from the Taiwanese and Korean semiconductor industries