摘要：We examine the implication of direct and indirect foreign competition on domestic
innovation decision. In most of the existing theoretical analyses the foreign firms are
assumed to enter the domestic-country market as an exporter and thus are subject to a tariff
duty imposed by the local government. We consider a broader setting where the foreign firm
also has the option of setting up a production unit in the domestic country to supply output to
the domestic country. This enables it to avoid the tariff that it faces due to export. Once we
allow for such a strategy option for the foreign firm, competition becomes more direct and
intense since tariffs no longer discount for the technological inferiority of home firms. We
show that innovation by the home firm will be discouraged at high tariffs under the threat of
DFI. Again at low tariff rates exports by the foreign firm make market competition more
intense and reduce the incentive for innovation. Hence the home firm always (never)
innovates at low (high) R&D cost whatever be the tariff rate. For intermediate R&D cost the
home firm innovates if the foreign firm opts for exports
关键词：Keywords: Innovation, Tariff, Foreign Direct Investment, Foreign Competition
