Resource title

Firm heterogeneity, imitation, and the incentives for cost reducing RandD effort

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The author develops and tests a model of strategic cost reducing RandD investments with heterogeneous rivals, where two groups of firms, innovating and non-innovating firms, are distinguished on the basis of their ability to introduce cost reducing innovations and imitate rivals' marginal cost improvements. The author provides conditions under which entry of a non-innovating rival provide a direct positive incentive effect on cost reducing investments and attenuates the disincentive effect of larger spillovers between innovating rivals on the equilibrium level of a firm's RandD effort. The comparative statics properties of the model are empirically verified by estimating the first order condition for the firm choice of the optimal level of cost reducing RandD, using the 1994 Carnegie Mellon survey on the appropriability of RandD in the US manufacturing sector. The empirical results also confirm that business unit size and RandD investments are simultaneously determined, and that RandD is proportional to size, as predicted by the theoretical model.

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Resource language

en

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application/pdf

Resource resource URL

http://flora.insead.edu/fichiersti_wp/inseadwp2003/2003-56.pdf

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Copyright INSEAD. All rights reserved