This paper examines whether a developing country's import restrictions are likely to increase or decrease the technological effort of its enterprises. The analysis incorporates a profit incentive effect, which induces an increase in output and technological effort of the protected enterprises, and an opposing X-inefficiency effect. The paper shows that the relative importance of these effects may differ between industries and also between enterprises in the same industry, depending on the nature of their products, their size and other characteristics. Consequently import restrictions may increase the technological effort of some enterprises, but have the opposite outcome in some others.
' Their two stages are as follows. In the first stage each duopolist determines the optimal level of its own technological effort, ignoring its rival's decisions; in the second stage the enterprises compete in the product market, given the technological effort and production costs achieved in the first stage.
' This point may need to be qualified. Larger enterprises may make greater use of imported technologies and so may have higher cross-elasticities of demand and this, in turn, may mean that import restrictions may induce an increase in thcir technological effort.