Endogenizing Know-How Flows Through the Nature of R&D Investments

38 Pages Posted: 24 Jan 2001

See all articles by Bruno Cassiman

Bruno Cassiman

IESE Business School; KU Leuven - Faculty of Business and Economics (FEB)

David Pérez-Castrillo

Universidad Autonoma de Barcelona; CESifo (Center for Economic Studies and Ifo Institute)

Reinhilde Veugelers

Catholic University of Leuven (KUL) - Department of Applied Economics; Centre for Economic Policy Research (CEPR)

Date Written: November 2000

Abstract

In this Paper we carefully link knowledge flows to and from a firm's innovation process with this firm's investment decisions. Three types of investments are considered: investments in applied research, investments in basic research, and investments in intellectual property protection. Only when basic research is performed can the firm effectively access incoming knowledge flows and these incoming spillovers serve to increase the efficiency of own applied research. The firm can at the same time influence outgoing knowledge flows - improving appropriability of its innovations - by investing in protection. Our results indicate that firms with small budgets for innovation will not invest in basic research. This occurs in the short run, when the budget for know-how creation is restricted, or in the long run, when market opportunities are low, when legal protection is not very important, or, when the pool of accessible and relevant external know-how is limited. The ratio of basic to applied research is non-decreasing in the size of the pool of accessible external know-how, the size and opportunity of the market, and, the effectiveness of intellectual property rights protection. This indicates the existence of economies of scale in basic research due to external market related factors. Empirical evidence from a sample of innovative manufacturing firms in Belgium confirms the economies of scale in basic research as a consequence of the firm's capacity to access external knowledge flows and to protect intellectual property, as well as the complementarity between legal and strategic investments.

Keywords: Basic R&D, intellectual property protection, spillovers

JEL Classification: L13, O32, O34

Suggested Citation

Cassiman, Bruno and Pérez-Castrillo, David and Veugelers, Reinhilde, Endogenizing Know-How Flows Through the Nature of R&D Investments (November 2000). CEPR Discussion Paper No. 2622. Available at SSRN: https://ssrn.com/abstract=257696

Bruno Cassiman (Contact Author)

IESE Business School ( email )

Avenida Pearson 21
Barcelona, 08034
Spain
+34 93 602 4426 (Phone)
+34 93 253 4343 (Fax)

KU Leuven - Faculty of Business and Economics (FEB) ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

David Pérez-Castrillo

Universidad Autonoma de Barcelona ( email )

Edifici B - Campus Bellaterra
Barcelona, 08193
Spain
(34 93) 381 1405 (Phone)
(34 93) 581 2012 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Reinhilde Veugelers

Catholic University of Leuven (KUL) - Department of Applied Economics ( email )

Leuven, B-3000
Belgium
+32 16 32 6908 (Phone)
+32 16 32 6732 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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