Fundamental R&D Spillovers and the Internationalization of a Firm's Research Activities

A conceptual framework is proposed for analyzing how differences in national R&D stocks can impact on a firm’s decision to internationalize its R&D activities. A central finding is that the integration of product markets can generate an added incentive to undertake R&D abroad. A three-stage analysis of a non-cooperative game is proposed, which entails cost-reducing process innovation in an international model of duopoly. Each firm’s technological efficiency depends not only on its investment in applied R&D, but also on its absorption of domestic and foreign fundamental R&D, as well as the extent to which the latter are substitutes or complements. In a first stage, a firm’s absorption of foreign fundamental R&D can be impacted by a decision to localize R&D activities abroad. The interrelation between this decision and initial production costs is also explored.