The competition-innovation debate: is R&D cooperation the answer?

Firms' investment in research and development (R&D) depends on both product market competition and R&D cooperation. In this paper, we use a simple duopoly model of product innovation to show that firms should choose to enter into different cooperative R&D arrangements depending on competition. Equilibrium behavior implies different competition-innovation relationships conditional on the nature of the cooperative arrangements that firms join. Therefore, variation in the set of feasible modes of cooperation may explain why different competition-innovation relationships are observed in empirical studies based on field data. Experimental evidence confirms the presence of similar incentives for cooperating despite some deviations from predicted values of R&D.