Journal of Economics

, Volume 112, Issue 3, pp 253–282

Innovation or imitation? The effect of spillovers and competitive pressure on firms’ R&D strategy choice



In this paper a firm’s R&D strategy is assumed to be endogenous and allowed to depend on both internal firm characteristics and external factors. Firms choose between two strategies, either they engage in R&D or abstain from own R&D and imitate the outcomes of innovators. This yields three types of equilibria, in which either all firms innovate, some firms innovate and others imitate, or no firm innovates. Firms’ equilibrium strategies crucially depend on external factors. We find that the efficiency of intellectual property rights protection positively affects firms’ incentives to engage in R&D, while excessive competitive pressure has a negative effect. In addition, smaller firms are found to be more likely to become imitators when the product is homogeneous and the level of spillovers is high. Regarding social welfare our results indicate that strengthening intellectual property protection can have an ambiguous effect. In markets characterized by a high rate of innovation a reduction of intellectual property rights protection can discourage innovative performance substantially. However, a reduction of patent protection can also increase social welfare because it may induce imitation. This indicates that policy issues such as the optimal length and breadth of patent protection cannot be resolved without taking into account specific market and firm characteristics.


Innovation Imitation Spillovers Product differentiation Market competition Intellectual property rights protection 

JEL Classification

O31 O34 L13 C62 C72 

Copyright information

© Springer-Verlag Wien 2013

Authors and Affiliations

  1. 1.Research Department Information and Communication TechnologiesCentre for European Economic Research (ZEW)MannheimGermany
  2. 2.Departament d’Economia and CREIPUniversitat Rovira i VirgiliReusSpain

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