Abstract
This study examines the relationship between technological imitation and firms' innovation activities and their incentives to innovate using US firm-level patent data for the period 1977-2005, finding that there are inverted-U shaped relationships between technological imitation and industry-average innovation activities and between technological imitation and firm-level market value of innovation. Our results suggest that positive externalities from the interactions among firms during the process of technological innovation dominate the negative effects of free riding concerns on firms' innovation activities and incentives to innovate up to quite a high level of technological imitation, while the free riding concerns dominate the positive externalities when the level of technological imitation is extremely high. Thus, creating innovation clusters and allowing different innovators to cooperate, imitate and compete with each other would be very effective in promoting corporate innovation.
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