R&D Spillovers and the Increasing of a Supplier's Research Activities

A conceptual framework is proposed for analyzing how differences in supplier's R&D reserve can impact on a supplier's decision to increase its R&D activities. A central finding is that the integration of product markets can generate an added incentive to undertake R&D activities to buyer's location. A three-stage analysis of a non-cooperative game is proposed, which entails cost-reducing process innovation in a supply chain model of duopoly. Each supplier's technological efficiency depends not only on its investment in applied R&D, but also on its absorption of supplier and buyer fundamental R&D, as well as the extent to which the latter are substitutes or complements. In a first stage, a supplier's absorption of buyer fundamental R&D can be impacted by a decision to focus R&D activities to buyer's location. The interrelation between this decision and initial production costs is also explored.