Absorptive Capacity, R&D Spillovers, and Public Policy

Dermot Leahy and J. Peter Neary

Abstract

Empirical evidence strongly suggests that R&D increases a firm's "absorptive capacity" (its ability to absorb spillovers from other firms) as well as contributing directly to profitability. We explore the theoretical implications of this. We specify a general model of the absorptive capacity process and show that costly absorption both raises the effectiveness of own R&D and lowers the effective spillover coefficient. This weakens the case for encouraging research joint ventures, even if there is complete information sharing between its members. It also implies an additional strategic pay-off to policies that raise the level of extra-industry knowledge.

JEL Codes: O31, L13

Keywords: Absorptive capacity of R&D; competition policy; industrial policy; R&D spillovers; research joint ventures.


This paper is forthcoming in the International Journal of Industrial Organisation. Click here for a pre-publication pdf version.

Click here to download a Gauss file to draw Figures 1, 2 and 3 for different values of the number of firms and the marginal efficiency of investment.

Please send any comments to: peter.neary@economics.ox.ac.uk

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