Growth and optimal policies in an R&D-growth model with imperfect international capital mobility

In this paper, we examine the effects of international capital mobility on innovation, growth, and optimal growth policies in a small open economy with R&D-driven growth. Households can borrow funds from an imperfect international capital market to finance their investment in R&D firms. We show that the economy can reach a higher growth rate if international capital is more mobile. This result is consistent with recent empirical findings. Moreover, we show that the common growth-enhancing policies, such as patent protection and the R&D subsidies, have an additional negative welfare effect when households can access the international capital market. Accordingly, the optimal patent protection and R&D subsidy should be smaller when the degree of international capital mobility is higher.