Spillovers and Strategic Dynamics in Product Innovation: Some implications to innovation policy in Japan

This paper estimates a dynamic oligopoly model of product innovation to evaluate an equilibrium effect of public policy on firms' innovation activities. The model considers a multi-agent Markov-Perfect Nash Equilibrium, allowing for firms' dynamic decision making on innovation activities and entry and exit. The estimation results obtained by using Japanese firm-level data on product innovation identify net positive spillovers among firms' dynamic innovation activities. Simulation exercises based on the obtained estimates indicate that, while the existing subsidies indeed encourage firms' innovation activities, they are far from optimal.