A Model of Innovation and Learning with Involuntary Spillovers and absorptive capacity

The purpose of this paper is to develop a model of innovation and learning that incorporates explicitly the need for a firm to conduct its own R&D in order to realize involuntary spillovers from other firms’ R&D activity, and the development of absorptive capacity of research firms over time. The conclusions of the model follow directly from the functional forms that are used to describe the generation and absorption of technological knowledge. The first proposition formally characterizes the steady-state rate of growth of technology for the model. The analysis also shows how some of the key features of two distinct, pure modes of organization of the production of new knowledge, the R&D model and the new localized knowledge model, are implied by our model by simply changing drastically the relative magnitude of two exogenous parameters: the ease of learning and the pace of knowledge advance. The second and last proposition formally characterizes the connections implied by the model between involuntary spillovers and absorptive capacity. Analysis of the long-term interactions between involuntary spillovers of knowledge and absorptive capacity provides the essential insights to understand the elements of a self-sustained process of endogenous growth.