Absorptive Capacity, R&D Spillovers and Public Policy

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. The paper explores the theoretical implications of this finding. A general model of the absorptive capacity process is specified, which shows 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 potential members. It also implies an additional strategic pay-off to policies that raise the level of extra-industry knowledge.

  • Authors: Dermot Leahy and J. Peter Neary
  • Year: 2004
  • Organisation: University of Dublin
  • Publisher: CEPR
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