The paper considers an extension of the Flam and Helpman model of North-South trade in which the government of South organizes and pays for R&D activity to reduce the production cost of quality-differentiated products. The main conclusions are the following: South has a welfare incentive to initiate R&D activity under some conditions on effectiveness of R&D in improving the technology. By doing so, South can increase the production of higher-quality differentiated products. North suffers a welfare loss from this R&D except in the case where the effectiveness of South's R&D activity is unusually high.