This paper studies theoretically and empirically the consequences of defensive strategies in R&D races. Using a quality ladders model we allow for endogeneous incumbent R&D advantages explained by strategies seeking to limit knowledge diffusion. Market institutions appear to be crucial to foster aggregate R&D intensity and to determine who innovates. Regulatory provisions reducing the possibilites of defensive strategies in the process of production may indeed increase the incentives to carry out R&D. This effect is more likely to be observed when the size of innovation is high. Using time-series cross-section data of manufacturing industries among 17 OECD countries we test the relationship between regulation and R&D expenditure over value added. We allow for a differentiated effect of regulation for industries producing and using ICT. The evidence is consistent with the model's predictions.
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