No Pain, No Gain: An R&D Model with Endogenous Absorptive Capacity

I investigate how the introduction of the absorptive-capacity hypothesis changes the results of strategic investment games with exogenous spillover. As a novelty, this paper distinguishes between two different components of R&D: absorptive R&D and inventive R&D . It is demonstrated that a new effect appears: The absorptive-capacity effect now counteracts the free-rider effect of the traditional models. The findings show that firms will invest more in R&D to strengthen absorptive capacity when the spillover parameter is higher. To learn from its competitor, a firm needs to develop its absorptive capacity: no pain, no gain.

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