Technology Blockade and R&D Investment Under Asymmetric Spillovers

This paper examines how technology blockade affects leader and follower firms’ research and development (R&D) incentives and their cooperation decisions under asymmetric knowledge spillovers, while also exploring the role of government subsidies in mitigating market failures and restoring cooperation incentives. Motivated by the increasing restrictions on knowledge diffusion in high-technology industries, we develop a two-stage game in which firms first choose R&D investment and then compete in quantities under both non-cooperative and cooperative regimes. Our analysis shows that the impact of technology blockade on firms’ R&D investment and profit distribution depends on R&D efficiency and the presence of asymmetric knowledge spillovers. Specifically, under non-cooperative behavior, the interaction between asymmetric spillovers and R&D efficiency generates nonlinear effects on both R&D efforts and profit allocation. Under cooperative regimes, although firms can internalize spillovers, technology blockade reduces coordination benefits and leads to asymmetric profits, resulting in the absence of a self-enforcing cooperation region. Furthermore, our results indicate that government subsidies can partially or fully restore cooperation incentives, thereby increasing R&D investment and enhancing social welfare in most cases. These findings highlight a substitution effect between policy intervention and external technological constraints, emphasizing the importance of targeted subsidies in mitigating the adverse effects of technology blockade on innovation and collaboration.