R&D Spillovers with Endogenous Absorptive Capacity: Lessons for Developing Countries

38 Pages Posted: 6 Jul 2016 Last revised: 6 Nov 2016

See all articles by Chankwon Bae

Chankwon Bae

Korea Institute for International Economic Policy

Date Written: June 30, 2016

Abstract

This paper analyzes the role of absorptive capacity in R&D spillovers through strategic R&D investments in a game-theoretic framework. In the model, a firm’s effective R&D is composed of idiosyncratic R&D, which produces its own innovations, and identical R&D, which improves absorptive capacity. The model shows that in the presence of absorptive capacity firms have a tendency to underinvest (overinvest) in idiosyncratic (identical) R&D relative to the social optimum. As the spillover becomes larger, firms decrease their own R&D while they become more inclined towards strategic exploitation of rivals’ efforts. Since the former effect overpowers the latter, the total amount of R&D decreases as the spillover increases. This is socially undesirable, providing a potential justification for a governmental subsidy for idiosyncratic R&D and a tax on identical R&D. The findings may have important implications for newly industrialized or emerging countries that consider a redirection of national R&D policy and intellectual property rights (IPR) regime.

Keywords: Absorptive Capacity, R&D, Spillovers

JEL Classification: L13, O31, O32, O38

Suggested Citation

Bae, Chankwon, R&D Spillovers with Endogenous Absorptive Capacity: Lessons for Developing Countries (June 30, 2016). East Asian Economic Review Vol. 20, No. 2 (June 2016) 191-228. Available at SSRN: https://ssrn.com/abstract=2804910 or http://dx.doi.org/10.2139/ssrn.2804910

Chankwon Bae (Contact Author)

Korea Institute for International Economic Policy ( email )

[30147] Building C, Sejong National Research Compl
Seoul, 370
Korea, Republic of (South Korea)

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