Endogenous R&D, R&D cooperation, and the mode of foreign expansion

I analyze the effect of firms' mode of foreign expansion on the incentive to innovate, and the impact of R&D activities and the spillover parameter on firms' international and R&D strategies based on the idea from Petit and Sanna-Randaccio (2000). This study considers a two-country imperfect competition model where both firms are located in the same country. I create four linear demand models and assume market structure is endogenously determined as the Nash equilibrium solution of a three stage game. Both firms must decide among three different decisions: how to expand abroad, how much to invest in R&D and how much to sell in each market configuration. The possibility for firms to choose their R&D strategies, R&D competition or R&D cooperation, in the R&D stage is also allowed.; In the identical demand model, I find that there are higher possibilities for both firms to choose asymmetric strategies when they are in the same location owing to the structural change of the model, especially in the export duopoly. The spillover parameter (alpha) plays a major role in my models since firms cooperate in R&D only if the spillover parameter is large enough. At a high level of spillover (alpha > 0.5), an increase in the level of R&D spillover raises the likelihood of investment in R&D and tends to encourage multinational expansion when firms conduct R&D cooperatively. On the other hand, an increase in the level of spillovers causes firms to move towards export strategy rather than FDI strategy assuming R&D competition. Furthermore, the highest level of consumer welfare is obtained when both firms are MNEs owing to a higher investment in R&D.; In the non-identical demand models, the results show that the difference in the intercepts of demand (z) and the difference in the slopes of demand (x), assuming that both z and x are positive, have negative effects on firms' levels of R&D under both R&D cooperation and competition. An increase in the value of z and x push firms' decisions to choose export strategy rather than FDI strategy due to a lower incentive to invest in R&D accordingly.; This dissertation examines the R&D-stimulating policies. The main findings prove that the provision of R&D subsidies leads firms to invest more in research and as a result firms tend to prefer FDI strategy. However, providing R&D subsidy in the R&D competition market is more effective in raising R&D activities and consumer welfare than subsidizing R&D in the cooperative market, as the implementation of both R&D cooperation and R&D subsidy seems to be redundant.