Spillovers, Rivalry and R&D Investment

Abstract

Spillovers of research knowledge are unavoidable. Most technologies have some public good aspects. Moreover, rival firms are able to, through industrial espionage and reverse engineering, access and copy new innovations and are thus able to eat into monopoly profits of innovators. The threat of spillovers affects R&D investments and consequently reduces innovative activity. Imitators spend resources on acquiring or copying existing innovations resources that would have otherwise gone into the pursuit and development of new products and processes. Industries with excessive spillovers are likely to have little private R&D investment and might have to rely on public R&D funding. While patents are designed to provide protection to inventors, they provide only imperfect protection against imitation. Mansfield, Schwartz, and Wagner [13] have shown that a large number of patented innovations are copied in a relatively short time. When patents do not provide adequate protection against spillovers, fewer innovations might be forthcoming and firms might choose to not patent. Research spillovers, however, are not without their benefits. Whereas perfect appropriability generates static efficiency by conferring a monopoly on an innovator, spillovers might be more efficient in a dynamic sense because of reduced duplication of research effort and perhaps more innovations in the long run. The presence of R&D spillovers thus creates a wedge between private and social returns to R&D.

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