Discussion Paper Details

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Title: Absorptive Capacity, R&D Spillovers and Public Policy

Author(s): Dermot Leahy and J Peter Neary

Publication Date: January 2004

Keyword(s): absorptive capacity of R&D, competition policy, industrial policy, R&D spillovers and research joint ventures

Programme Area(s): International Trade and Regional Economics

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.

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Bibliographic Reference

Leahy, D and Neary, J. 2004. 'Absorptive Capacity, R&D Spillovers and Public Policy'. London, Centre for Economic Policy Research.