South-South Parallel Import and Cost Reducing Innovation in the Pharmaceutical Industry: An Alternative Approach
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This paper studies how South-South parallel import (PI) affects cost reducing R&D effort by heterogeneous firms located in an emerging country. Specifically, when a technologically inferior firm moves to exploit a new unregulated Southern market, the impact of PI on innovation is determined by the degree of heterogeneity between firms and trade policy. Innovation by one or both firms may increase when the technological gap between firms is low and tariffs are sufficiently large. PI can also enhance social welfare by creating stimulus for innovation.