R&D Networks with Strategic Substitutability

• DOI: http://doi.org/10.1111/rode.12088
• Published date: 01 May 2014
• Author: Lei Zu,Zhiwei Cui,Ziran Li,Jin Zhang
• Date: 01 May 2014

R&D Networks with Strategic Substitutability

Zhiwei Cui, Ziran Li, Jin Zhang, and Lei Zu*

Abstract

This paper considers a non-cooperative R&D network formation game. Instead of concentrating on R&D

cooperation among firms, the paper focuses on one-way externality flow in which each firm forms links in

the attempt to acquire others’ R&D knowledge. It is assumed that a firm has an internal R&D strategy (in-

house R&D) and an external R&D strategy (knowledge acquisition) and that these two strategic options

are substitutes. It is found that a firm will trade off its own investment cost and acquisition cost. Conse-

quently, the equilibrium network is empty when investment or linkage cost is high, whereas the equilibrium

network is of core–periphery structure when both costs are relatively low, with core firms investing in R&D

activities and periphery firms accessing R&D knowledge from core ones. The paper also investigates effi-

ciency and the conclusion is that although an efficient R&D network is a periphery-sponsored star, the core

firm tends to underinvest in Nash equilibrium.

1. Introduction

Technological progress is one of the major driving forces of economic growth in both

developing and developed countries (Savvides and Zachariadis, 2005; Zachariadis,

2004). It can be fulfilled at the firm level by in-house R&D activities and/or through

external R&D means [such as foreign direct investment (FDI) and technological

trade]. Firms may, however, differ in their attitudes towards building technology

through these channels. It depends on their competitive relationships with others, the

level of technological complexity involved and endowments. There has been a

growing complexity in the technologies used for production and innovation since the

1980s. Firms have increasingly discovered that their in-house innovative capabilities

are insufficient for developing these technologies. Thus more and more firms have

pursued an open innovation approach, involving the purchase of patents, or forming

research joint ventures with other firms. Consequently, a typical firm has two ways to

improve its production technology: internal R&D strategy, in which it undertakes

independent in-house R&D; and external R&D strategy, where it access R&D

knowledge through cooperative or non-cooperative activities.

A voluminous literature has focused on pairwise collaborative links (Goyal and

Moraga-Gonzalez, 2001; Goyal and Joshi, 2003). Each link represents an agreement

on joint research project by two collaborators. The benefits for collaborating firms

arise from sharing knowledge about a cost-reducing technology. This two-way flow of

influence has been central to the study of R&D; however, there also exists another

* Li: China Financial Futures Exchange, Shanghai 200122, PR China. Tel: +86-13910189015; E-mail: lizr@

cffex.com.cn. Cui: School of Economics and Management, Beihang University, Beijing 100191, PR China.

Zhang: Department of Economics, University of International Business and Economics, Beijing 100029,

PR China. Zu: Department of Management Science, Central University of Finance and Economics, Beijing

100081, PR China. The authors thank the anonymous referee for the helpful comments and suggestions.

They are also grateful to numerous participants in the IEFS China 2012 Conference. This work is sup-

ported by the National Science Foundation of China (Grants Nos. 71001002, 71133001, 71003094 and

71073019).

Review of Development Economics, 18(2), 340–353, 2014

DOI:10.1111/rode.12088

© 2014 John Wiley & Sons Ltd