Abstract
We consider a reciprocal dumping model with two countries where each owns a multiproduct firm selling its products to both countries. The firms choose the R&D investment portfolio for the two products, and each government may subsidize or tax its domestic firm for the R&D investment. We show that each firm invest more R&D for its core (non-core) product if two products are sufficiently differentiated (similar) to each other, and the degree of R&D specialization increases (decreases) as two products become more similar if the initial degree of product substitutability is sufficiently low (high). Policy competition results in unilateral incentives of a subsidy, and the stable optimal policy is always a subsidy. When two governments harmonize their policies, it is optimal for them to set subsidies equal to zero. Moreover, the optimal subsidy under policy competition will be higher than that when the firms are multiproduct monopolists if and only if two governments’ policies are strategic substitutes, and vice versa.