This paper examines and compares the impact on growth of government’s funding national
R&D or providing a tax rate reduction for foreign investment in R&D. In an innovationbased
model we show the relation between the costs of these two policies. One meaningful
policy implication of our results is that, to accelerate innovation, governments should adopt
a tax rate deduction for foreign R&D, rather than subsidizing national R&D, because the
former is more economical and effective than the latter.