Abstract

The paper develops an oligopoly model of innovation and applies it to data from the Mannheim Innovation Panel. The model circumvents the need for market share and price elasticity data which typically can only be determined with measurement error and are therefore a major source of misspecification. The regression results suggest that access to sources of information is an important determinant for the firm's R&D activity. Endogenous protection mechanisms such as lead time, design complexity, etc. are important determinants of overall innovation expenditures, but not for R&D specifically. If legal protection mechanisms (such as patents) are effective, they exert a positive effect on R&D spending. Firm-specific financing conditions also affect the innovation activity of the firm. Specification tests derived from the theoretical model do not lead to a rejection of the validity of the empirical model.