Industrial Policy to Develop a Multi-Firm Industry

Industrial Policy to Develop a Multi-Firm Industry Governments face pressure to act when coordination and learning externalities block development of otherwise-profitable industries that would produce merit goods for the domestic market. A short-term subsidy that offsets these externalities could potentially jump-start a multi-firm industry, if the subsidy induces a pioneer firm to enter and then the pioneer’s first-period output generates coordination and learning externalities. These externalities could induce subsequent entry by input suppliers and/or competitors. However, empirical evidence raises questions about the ability of governments to use short-term subsidies to jump-start new industries. We explore one explanation for the difficulty of jump-starting new industries: the subsidy could generate counter-productive incentives for the pioneer firm to prevent entry of additional firms. We model the jump-start strategy and examine whether coupling a short-term fixed subsidy with a per-unit subsidy can achieve the objective of creating a multi-firm industry. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png "Journal of Industry, Competition and Trade" Springer Journals

Industrial Policy to Develop a Multi-Firm Industry

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Publisher
Springer US
Copyright
Copyright © 2017 by The Author(s)
Subject
Economics; Industrial Organization; Economic Policy; R & D/Technology Policy; European Integration; Microeconomics; International Economics
ISSN
1566-1679
eISSN
1573-7012
D.O.I.
10.1007/s10842-016-0242-z
Publisher site
See Article on Publisher Site

Abstract

Governments face pressure to act when coordination and learning externalities block development of otherwise-profitable industries that would produce merit goods for the domestic market. A short-term subsidy that offsets these externalities could potentially jump-start a multi-firm industry, if the subsidy induces a pioneer firm to enter and then the pioneer’s first-period output generates coordination and learning externalities. These externalities could induce subsequent entry by input suppliers and/or competitors. However, empirical evidence raises questions about the ability of governments to use short-term subsidies to jump-start new industries. We explore one explanation for the difficulty of jump-starting new industries: the subsidy could generate counter-productive incentives for the pioneer firm to prevent entry of additional firms. We model the jump-start strategy and examine whether coupling a short-term fixed subsidy with a per-unit subsidy can achieve the objective of creating a multi-firm industry.

Journal

"Journal of Industry, Competition and Trade"Springer Journals

Published: Jan 23, 2017

References

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