Absorptive Capacity in R&D Joint Ventures When Basic Research Is Costly

Abstract ``Absorptive capacity" – a firm's ability to assimilate information acquired from other firms – can depend on the amount of basic research it conducts. The optimal expenditures on basic research depend on its costs, and these expenditures in turn affect the amount of applied research a firm conducts to lower production costs. This paper shows that firms' expenditures on basic research can differ from the socially optimal levels, and the difference depends on the magnitude of the basic research costs and the amount of research collaboration between the firms. Policy responses that could bring firm behavior in line with that which is socially desirable are discussed as well.