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

In this paper a firm's R&D strategy is assumed to be endogenous and allowed to depend on both internal firm 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. This yield...

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Bibliographic Details
Published in:Journal of economics (Vienna, Austria) Austria), 2014-07, Vol.112 (3), p.253-282
Main Authors: Slivko, Olga, Theilen, Bernd
Format: Article
Language:English
Subjects:
Business innovation
Competition
Disruptive innovation
Duopoly
Economic competition
Economic theory
Economic Theory/Quantitative Economics/Mathematical Methods
Economics
Economics and Finance
Equilibrium
Game Theory
Incentives
Industrial market
Innovations
Intellectual property
Macroeconomics/Monetary Economics//Financial Economics
Market shares
Microeconomics
Product differentiation
Product innovation
Production costs
Public Finance
R&D
Research & development
Social and Behav. Sciences
Social welfare
Studies
Technological innovation
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Summary:In this paper a firm's R&D strategy is assumed to be endogenous and allowed to depend on both internal firm 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. This yields three types of equilibria, in which either all firms innovate, some firms innovate and others imitate, or no firm innovates. Firms' equilibrium strategies crucially depend on external factors. We find that the efficiency of intellectual property rights protection positively affects firms' incentives to engage in R&D, while excessive competitive pressure has a negative effect. In addition, smaller firms are found to be more likely to become imitators when the product is homogeneous and the level of spillovers is high. Regarding social welfare our results indicate that strengthening intellectual property protection can have an ambiguous effect. 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 specific market and firm characteristics.
ISSN:0931-8658
1617-7134
DOI:10.1007/s00712-013-0361-5