Competitive investments between basic R&D and applied R&D with information spillovers

The impacts of information spillovers on Research and Development (R&D) choices are investigated in a two-stage Cournot duopoly where two firms simultaneously and non-cooperatively determine their levels of applied R&D aiming at the creation of a new process and basic R&D devoted to the improvement of absorptive capacity. Through a comparative static analysis, it is demonstrated that as more information associated with applied R&D spills out, each firm will shift its R&D expenditure from applied R&D to basic R&D if the efficiency of basic R&D is relatively low. Similarly, a relatively higher spillover degree of basic R&D induces each firm to invest less in basic R&D and more in applied R&D. However, in some cases both firms will reduce their efforts in the two types of R&D as more R&D know-how leaks out. Furthermore, the increase in applied R&D spillovers always contributes to the two firms and the society. Assuming that the efficiency of basic R&D is sufficiently low, as basic R&D becomes more appropriable, firms’ profits and social welfare will be decreased (improved), provided that the spillover level of basic R&D is relatively small (large).