Should We Enhance or Restrict Technological Diffusion from Major to Minor Firms?

Hideki Nakamura,Tomoya Ikeda

doi:10.4236/tel.2018.811146

Abstract

This study examines how technological diffusion from a major firm to a minor firm affects social welfare via R & D competition in an asymmetric Cournot duopoly. We assume that the minor firm can decrease its production cost because of the spillover effect arising through R & D by the major firm. R & D by the minor firm depends on the free-riding effect and a taking-away effect that removes market share from the major firm. If given a low R & D cost, both firms invest in R & D with an appropriate level of technological diffusion, we can obtain a high level of social welfare. However, an increase in the level of technological diffusion could make the major firm abandon R & D activity. Given a high R & D cost, a high level of welfare can be obtained only with a low level of technological diffusion because the potential presence of technological diffusion easily disrupts R & D by the major firm.

Highlights

Multinational firms in developed economies extend their businesses to newly industrializing economies to secure new markets and lower wage costs
This study examined how technological diffusion from a major firm to a minor firm affects social welfare via R & D competition
If the R & D cost is low, the decision of R & D by the minor firm depends on the free-riding and taking-away effects

Summary

Introduction

Multinational firms in developed economies extend their businesses to newly industrializing economies to secure new markets and lower wage costs. Given a high level of technological diffusion, the minor firm but not the major firm, invests in R & D because the taking-away effect outweighs the free-riding effect. When firm 1 invests in R & D, the consumer surplus increases with an increase in the level of technological diffusion because of a decline in the production cost of firm 2.

Results

Conclusion