According to Gans & Stern (1999), firms engage in R&D spending, in part, in order to improve their bargaining position as buyers in the market for technology. This theory is tested empirically with data from the pharmaceutical industry. We develop and estimate a structural model of R&D spending and licensing. We find that R&D spending does improve the bargaining position of licensees; although, the effect is small. In the absence of the bargaining power effect, spending on R&D would be about 6% lower than it is. We also find that entry of technology licensors reduces firms’ own R&D but has a positive overall effect on innovation.
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