Spillover Feedback Loops and Strategic Complements in R&D
Abstract
This paper studies, in a two period model, the effects of knowledge spillovers among product market competitors on R&D levels. It argues that when firms' R&D decisions are strategic complements, in industries in which spillovers increase the marginal productivity of a firm's R&D, both incoming and outgoing spillovers spur R&D in equilibrium. Outgoing spillovers can foster innovation even in a homogeneous-product industry. In these industries, the IP law should be such that facilitates knowledge diffusion. If firms have power in deciding the level of knowledge spillovers, we show that a firm will choose to disclose its knowledge to its product market competitors.