Subsidy and entry : role of licensing

The purpose of this paper is to highlight the role of a lump-sum subsidy in improving the welfare of a country. The lump-sum subsidy payment does not affect the marginal calculations of these firms; but, it can significantly alter other incentives of the firms. We show that the credible commitment of a domestic government for providing a lump-sum subsidy encourages technology licensing provided initial technologies of these firms are close enough. As a result, the goverrmlent of the domestic country does not need to provide the subsidy at all and the conmlitment to the subsidy policy is enough to increase the welfare of the domestic country.