Abstract: This paper studies how a tariff reduction influences the productive efficiency of a public firm competing against a private firm, by focusing on the public firm's incentive to make costreducing R&D investment. It is shown that if a tariff reduction induces a foreign firm to enter into the domestic market wherein public monopoly prevails, the public firm's productive efficiency deteriorates dramatically. However, subsequent trade liberalization steadily improves the efficiency. Furthermore, it is also shown that efficiency under trade liberalization can be higher than that under public monopoly, depending on the curvature of the public firm's reaction curve and demand curve.

JEL Classification: L13;L32;F13
Keywords: Cournot competition; Public Enterprises; R&D; Trade Liberalization;