Innovation or imitation? The effect of spillovers and competitive pressure on firms’ R&D strategy choice

Abstract

This article provides a theoretical and empirical analysis of a …rm's optimal R&D strategy choice. In this paper a …rm's R&D strategy is assumed to be endogenous and allowed to depend on both internal …rms' characteristics and external factors. Firms choose between two strategies, either they engage in R&D or abstain from own R&D and imitate the outcomes of innovators. In the theoretical model this yields three types of equilibria in which either all …rms innovate, some …rms innovate and others imitate, or no …rm innovates. Firms'equilibrium strategies crucially depend on external factors. We …nd that the e¢ ciency of intellectual property rights protection positively a¤ects …rms'incentives to engage in R&D, while competitive pressure has a negative e¤ect. In addition, smaller …rms are found to be more likely to become imitators when the product is homogeneous and the level of spillovers is high. These results are supported by empirical evidence for German …rms from manufacturing and services sectors.Regarding social welfare our results indicate that strengthening intellectual property protection can have an ambiguous e¤ect. In markets characterized by a high rate of innovation a reduction of intellectual property rights protection can discourage innovative performance substantially. However, a reduction of patent protection can also increase social welfare because it may induce imitation. This indicates that policy issues such as the optimal length and breadth of patent protection cannot be resolved without taking into account speci…c market and …rm characteristics.Journal of Economic Literature Classi…cation Numbers: C35, D43, L13, L22, O31.

R&D and non-linear productivity growth

“…However-notwithstanding this source of sample selection-our analysis still provides interesting insights, and has even certain support from the empirical evidence on the concentration of innovative activities. It is well documented in the previous literature that innovative activities are highly concentrated-only a small share of firms around the world innovate, the majority of firms in most regions around the world do not engage in any significant R&D activities, they imitate (Slivko and Theilen, 2014). Hence, by considering the top 1500 innovators, which account for more than 80% of global R&D expenditure (top 2500 account for more than 90% of global R&D expenditure), ensures certain representativeness.…”

Protection of Intellectual Property and its Economic Aspects

“…Slivko and B. Theilen (2014) in such a context suggests that protection of intellectual property may have an ambiguous influence. In the markets that have a high rate of innovations, a reduction in protection of intellectual property in a substantial manner may discourage innovation performance.…”

THE OPTIMAL RISK CHOICE OF COOPERATIVE AND NONCOOPERATIVE R&D IN DUOPOLY WITH SPILLOVERS

“…Consider an industry with only two firms where each produces differentiated (or homogeneous) goods. As in d'Aspremont and Jacquemin (), Hinloopen (), Mantovani (), Shi (), Slivko and Theilen () and many other papers, the inverse demand function is assumed to be linear: where and are the product output and price of firm i . Moreover, is the price intercept of the inverse demand function, i.e., it represents actual prices when all outputs are zero, which depends on the inherent quality of the product, b measures the impact of product price on the demand and d () represents the degree of substitutability between two firms’ products.…”

“…THE MODEL Consider an industry with only two firms where each produces differentiated (or homogeneous) goods. As in d' Aspremont and Jacquemin (1988), Hinloopen (1997), Mantovani (2006), Shi (2012), Slivko and Theilen (2014) and many other papers, the inverse demand function is assumed to be linear:…”