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 (a) a foreign collaboration would be efficient but a local collaboration emerges in equilibrium, and (b) 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.