Technology spillovers are important because they have a large impact on economic growth. In the interpretation of, e.g., Grossman and Helpman (1991), technology spillovers increase the efficiency of the research process within an individual firm. The notion that is behind this is that technological knowledge is a non-rival good, Le., can be shared without reducing its value. The paradoxical situation is that this characteristic of knowledge, while beneficial at the aggregate level, leads to a lack of incentives to produce knowledge at the micro level. The reason is that firms that have the prospect that the knowledge they develop will be imitated by other firms at lower costs will decide not to invest in research.
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