UC Davis

Just like people, industries have a lifecycle. My dissertation explores how trade and industrial policy affect innovation and welfare across the industry lifecycle—often called the ``product cycle.'' Recently, new frontier technologies such as artificial intelligence, robotics, and green energy technologies have been rapidly emerging in what Klaus Schwab has labelled the `Fourth Industrial Revolution' (\citealp{schwab2017fourth}). This dissertation suggests that by taking into account the industry lifecycle, policy can have a more significant impact on the welfare of not only the implementing country but also its counterparts, compared to a time when new industries have become well-established and mature.

In the first chapter, I develop a simple open economy model that incorporates productivity dynamics suggested by the industry lifecycle. In this lifecycle, productivity is low and does not grow significantly in the early stage, then after a radical innovation, it grows very fast for a while before tapering off. The model suggests important policy implications. First, considering industry lifecycle when designing industrial policy is important since the growth potential and degree of externality vary depending on the stage of the targeted industry's lifecycle. Second, policymakers need to take into account the difference in timing when policy costs and benefits occur. The model shows that industrial policy reduces instantaneous utility in the short run due to distortions created by the policy, but it can increase overall welfare by accelerating innovation in the targeted industry in the long run. Third, home industrial policy can increase foreign welfare through the terms-of-trade effect, meaning the foreign country can benefit from the lower home product price due to home innovation.

In the second chapter, I present a general framework for analyzing the welfare effects of industrial policy when a country is hastening to catch up to the technological frontier, versus racing to create new technologies. The model in this chapter, which incorporates industry lifecycle theory into an open economy macroeconomic model by \cite{corsetti2007}, provides distinct welfare implications in two scenarios: \emph{catch-up} and \emph{frontier technology races}. In the former scenario, the targeted industry is nascent with high growth potential at home, but mature abroad. In contrast, in the latter scenario, both the home and foreign industries have high growth potential and are in competition with each other. For the home country, a production subsidy accelerates innovation in the targeted industry and thus can enhance welfare in both scenarios, despite a trade-off between short-term losses and long-term gains. For the foreign country, in the catch-up scenario, a home production subsidy unambiguously increases foreign welfare. Conversely, in the scenario of frontier technology races, it may induce a beggar-thy-neighbor effect by delaying innovation abroad. In such circumstances, the foreign country responds by implementing aggressive countervailing policies to mitigate the negative spillover effects. If both countries instead cooperatively support the industry, the welfare outcome is a Pareto improvement compared to the Nash equilibrium.

In the third chapter, I explore the reasons why many countries support industries essential for transitioning to a green economy, despite the cost of converting to green energy and the opportunities for free-riding on other countries' carbon abatement. By incorporating the negative externalities from greenhouse gas emissions into the open-economy macroeconomic model developed in Chapter \ref{ch:2ndChapterLabel}, I analyze the welfare effects of industrial policies that subsidize production of capital goods (like solar panels or wind turbines) used to produce green energy. The model predicts that a production subsidy for the green capital goods industry is desirable for the home country, as it accelerates innovation in the industry and consequently green energy adoption. This acceleration at home delays innovation abroad, generating a beggar-thy-neighbor effect, despite the environmental benefits from home innovation. Thus, in a Nash equilibrium, both nations competitively raise production subsidies, improving welfare in both countries by reducing distortions created by the subsidy and greenhouse gas emissions. A cooperative equilibrium still yields a Pareto improvement, given the incomplete resolution of the free-riding problem in the Nash equilibrium. To quantitatively analyze the welfare and environmental effects of policies implemented by the US and the EU, I estimate the innovation timing elasticity, showing for the first time that the pace of innovation increases with the number of firms operating in an industry. The estimate is sufficiently high to shift the optimal national policy from free-riding to subsidizing green capital goods production in the quantitative analysis.