Sunk Costs, Innovation, And Spillover Effects In R&D-Intensive Industries

Abstract

This paper establishes a theoretical relationship between the sunkness of a firms cost and its degree of innovation, as measured by the number of patents and trademarks introduced in the market. Departing from the assumption that incumbents and potential entrants are risk-averse, we demonstrate that the presence of such costs is not a barrier to entry, as it is usually considered to be, but it acts as a stimulus to R&D activities. The empirical results confirm this assertion for the sample and the period examined. In the light of these results public policies encouraging R&D activities such as tax credits, grants, etc., should be reexamined carefully.