This paper reconsiders the explanation of R&D subsidies by Spencer and Brander (1983) and others by allowing firms to license their innovations and to pool their R&D investments. We show that in equilibrium R&D joint ventures are formed and licensing occurs in a way that eliminates the strategic...

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...