Inter-firm R&D collaboration within and across national borders

We set up a model to investigate the strategic aspect of a firm’s incentive to collaborate in cost-reducing R&D with either a local or a foreign partner. We argue that collaboration with a foreign firm is preferred to collaboration with a local firm if the extra profits generated by a foreign collaboration exceed the additional cost of coordinating collaboration across national borders. We show that foreign collaboration is more likely the bigger the home-market-size of the foreign firm and, given certain conditions, the higher the international trade cost. We also show that whenever a foreign collaboration arises in equilibrium, it is efficient (i.e. world-welfare-maximising); and that there are cases where: (i) a foreign collaboration would be efficient but a local collaboration emerges in equilibrium; and (ii) an efficient foreign collaboration emerges in equilibrium, but one of the countries would prefer a local collaboration. We briefly consider the policy implications of these findings.