Trade liberalization and product R&D in a differentiated duopoly

This paper employs an intra-industry trade model with one firm in each country to examine the impact of trade liberalization on firms' incentives to engage in product R&D. We show that trade liberalization may decrease a firm's product R&D if the marginal willingness to pay for the firm's innovation from its home consumers is higher than that from its foreign consumers. This negative relationship between trade liberalization and R&D investments is opposite to the standard result in the literature where the firms engage in process R&D.