GDL

This paper examines the determinants of the allocation of national R&D resources


between research and development activities. We derive conditions under which a firm


being outdistanced by a foreign rival in a two-stage international patent race would drop


out, and relate those conditions to home-market size and to the race’s cost and risk


characteristics. Because of this ‘‘discouragement effect’’, firms located in smaller markets


appear as if they were, on average, less successful in transforming research expertise into


commercial product development.We also show that in a two-sector model (R and D), the


proportion of R&D resources going into product development as opposed to research


increases with country size. Moreover, starting from a symmetric game and increasing the


size of one country induces the opposite effect on other countries (a shift of R&D resources


from development to research) through strategic interaction among research teams.

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