||Under international agreements the tools for active government policies with respect to international trade are becoming fairly limited. In such situations, less standard and less regulated means how to shift or gain competitive advantage become more appealing for governments. Whereas certain measures replacing former tariffs and quotas have rather limited applicability - such as import-strict technical standards or environmental and workplace regulation – government involvement in the field of R&D is rather unregulated area under the WTO. Recent development in the European Union connected with the implementation of the Lisbon agenda highlights the fact that an increased attention is being paid to the R&D issue by European governments. The thesis develops a theoretical model on a North-South basis where the motivations for the developed country to subsidize R&D are examined even when there exist international spillovers benefiting foreign competitors at the expense of developed country’s innovators. It is shown that in such case the North cannot apply the standard methods prescribed by the third-market strategic trade policies, however the government may still play an important role in motivating the firms to invest in R&D or shaping the welfare effects of innovation through promotion of intra-national or intra-union technology spillovers. The implementation of the Lisbon strategy is then weighted against particular recommendations of the theoretical model to analyze to which extent the European strategy fits even for the modeled situation.