FIRM HETEROGENEITY, IMITATION, AND THE INCENTIVES FOR COST REDUCING R&D EFFORT*

Marco Ceccagnoli

Journal of Industrial Economics, 2005, vol. 53, issue 1, 83-100

Abstract: I develop and test a model of strategic R&D investments where innovating and non‐innovating firms compete on the basis of their ability to reduce costs and imitate rivals. I find that a larger proportion of non‐innovating rivals stimulates cost‐reducing investments and attenuates the disincentive effect of imitation by innovators on firm level R&D. Key model properties are verified by estimating the first order condition for the optimal choice of R&D, using the 1994 Carnegie Mellon survey of U.S. industrial R&D. Results also suggest that R&D and size are simultaneously determined, with R&D being proportional to size, as predicted by the theoretical model.

Date: 2005
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