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Spillovers, product substitution and R&D investment : theory and evidence

Author

Listed:
  • Thomas Grebel

    (Economics Deprtment, TU Ilmenau)

  • Lionel Nesta

    (Ofce)

Abstract

We investigate the conditions under which R&D investment by rival firms may be negatively or positively correlated. Using a two-stage game the influence of spillovers and product substitution is investigated. It is shown that under Cournot competition, the sign of the R&D reaction function depends on four types of environments in terms of the level of product substitution and of spillovers. We then test the prediction of the model on the world’s largest manufacturing corporations. We assume that firms make oblivious R&D investments based on the R&D decision of the average rival company. We then develop a dynamic panel data model that accounts for the endogeneity of the decision of the mean rival firms. Results corroborate the validity of the theoretical model.

Suggested Citation

  • Thomas Grebel & Lionel Nesta, 2013. "Spillovers, product substitution and R&D investment : theory and evidence," Documents de Travail de l'OFCE 2013-22, Observatoire Francais des Conjonctures Economiques (OFCE).
  • Handle: RePEc:fce:doctra:1322
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    Keywords

    Process R&D; Spillovers; Product substitution; Reaction function; GMM;

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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