Firm heterogeneity, imitation, and the incentives for cost reducing R&D effort

I develop and test a model of strategic RID investments where innovating and non-innovating firms compete on the basis of their ability to reduce costs and imitate rivals. I find that a larger proportion of non-innovating rivals stimulates cost-reducing investments and attenuates the disincentive effect of imitation by innovators on firm level RID. Key model properties are verified by estimating the first order condition for the optimal choice of RID, using the 1994 Carnegie Mellon survey of U.S. industrial RID. Results also suggest that RID and size are simultaneously determined, with RID being proportional to size, as predicted by the theoretical model.