Co-operation versus Non Co-operation in R&D Competition with Spillovers. Discussion Paper No. 166

This paper seeks to analyse a case in which firms choose to divide their R&D expenditures into two components: competitive R&D and Joint-Venture R&D. The analysis is motivated by the fact that R&D outputs can have different degrees of non-excludability. It is therefore reasonable to expect that a firm will allocate a part of its funds to competitive R&D; this is the case in areas in which research is non-excludable to a smaller degree, and part of it to Joint-Venture R&D, in cases where R&D output is highly non-excludable. This issue is addressed in a three-stage model of a duopoly, in which joint-venture R&D and competitive R&D are chosen in the first and second stages while the quantity of the product is chosen in the third stage. The results confirm that allocation of expenditure to the joint-venture component increases as the spillover rate on the competitive component increases. Furthermore, if firms are able to coordinate their joint-venture R&D levels, there is greater incentive to increase this allocation. However, for these results to obtain, it is crucial that the two types of R&D are chosen sequentially; a simultaneous choice would lead to a corner solution in which only competitive R&D is chosen.