Infant Industry Protection and Industrial Dynamics

28 Pages Posted: 12 Nov 2009

See all articles by Josh Ederington

Josh Ederington

University of Kentucky - Department of Economics

Phillip McCalman

University of California, Santa Cruz - Department of Economics

Date Written: October 2009

Abstract

A perennial case for industrial policy is based on the protection of young or emerging industries. Despite a natural association with concepts of life cycles, industrial policy has not been analyzed in the context of an industry life-cycle model. In particular, an important life-cycle characteristic, the potential for very large changes in the rate of net entry, is ignored. In this paper, we demonstrate how the impact of industrial policy depends critically on the entry and exit dynamics within an industry. In particular, we construct a model of technology adoption in which the number of firms is endogenous, and derive a set of novel predictions about the effects of protection on firm technology decisions. Specifically, we show that permanent protection can induce earlier adoption, but also decreases the probability that a given firm adopts the new technology. Likewise, we demonstrate that reducing the duration of protection results in faster adoption than permanent protection, but also reduces a given firms probability of adoption. Finally, we show that, for industries characterized by flexibility in firm numbers, protection does not change the rate of technology adoption but does increase the size and probability of a shakeout (large scale net exit).

Keywords: GATT/WTO, Trade Policy, Trade and Firm Productivity

JEL Classification: F1

Suggested Citation

Ederington, Josh and McCalman, Phillip, Infant Industry Protection and Industrial Dynamics (October 2009). Available at SSRN: https://ssrn.com/abstract=1503419 or http://dx.doi.org/10.2139/ssrn.1503419

Josh Ederington (Contact Author)

University of Kentucky - Department of Economics ( email )

335 Business and Economics Building
Lexington, KY 40506
United States

Phillip McCalman

University of California, Santa Cruz - Department of Economics ( email )

Santa Cruz, CA 95064
United States
(831) 459-4381 (Phone)
(831) 459-5900 (Fax)

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