This paper develops an R&D-based growth model featuring international R&D funding and patent collateral. Several main findings emerge from the analysis. First, with an inelastic labor supply, a rise in the fraction of patent collateral is beneficial to both innovations and economic growth. Second, when labor supply is inelastic, a rise in either the foreign interest rate or the fraction of borrowed R&D funding is harmful to innovations and economic growth. Third, our numerical results show that the above two findings are robust when labor is supplied elastically. Finally, our numerical results indicate that, regardless of whether labor supply is inelastic or elastic, the government can implement an optimal patent breadth policy to maximize the social welfare level. Our numerical results also point out that this optimal patent breadth will decrease in response to a reduction in the foreign interest rate, a rise in the fraction of the collateral, and a reduction in the fraction of borrowed R&D labor costs.
INTERNATIONAL REVIEW OF ECONOMICS & FINANCE, 51, 545-561