ABSTRACT
We model an emerging firm as one purchasing a basic research and development (R&D) option to develop a new technology or product. This chapter assumes that the innovation the firm would make is not an end-use product but a product or process that will lead to further generic or targeted product or process developments. Recent developments have shown that rapid advances in business technology give rise to additional benefits to the extent that they spur demand by broadening application. The chapter presents a two-firm model to simplify the analysis without any loss of generalities. It considers a simplified information structure in which the firms are of two types. Firm H is assumed to be a high-type company in the sense that it is capable of producing superior R&D performance. Firm L, on the other hand, is considered a low-type.
