This article estimates a dynamic structural model of rm R&D investment in twelve Swedish manufacturing industries and uses it to measure rates of return to R&D and to simulate the impact of trade restrictions on the investment incentives. R&D spending is
found to have a larger impact on rm productivity in the export market than in the domestic
market. Export market pro ts are a substantial source of the expected return to R&D.
Counterfactual simulations show that trade restrictions lower both the expected return to
R&D and R&D investment level, thus reducing an important source of the dynamic gains
from trade. A 20 percent tari on Swedish exports reduces the expected bene ts of R&D
by an average of 32.2 percent and lowers the amount of R&D spending by 13.9 percent in
the high-tech industries. The corresponding reductions in the low-tech industries are 30.4
and 8.9 percent, respectively. R&D adjustments in response to export tari s mainly occur
on the intensive, rather than the extensive, margin.JEL Classi cation: L6, O3, L13, F1
