Cost-Reducing and Demand-Creating R&D with Spillovers

This article analyzes R&D policies when the returns to cost-reducing and demand-creating R&D are imperfectly appropriable and market structure is endogenous. We generalize previous characterizations of appropriability to permit the possibility that own and rival R&D are imperfect substitutes. We also describe how equilibrium expenditures on process and product R&D, as well as equilibrium market structure, depend on technological opportunities and spillovers. In contrast to previous work, diminished appropriability does not necessarily reduce R&D expenditures. For example, under some conditions, an increase in the extent of process (product) spillovers will lead to an increase in product (process) R&D. We estimate several variants of the model by using manufacturing line-of-business data and data from a survey of R&D executives.