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This paper provides a theoretical and empirical framework to explore how public funding affects firms' R&D investments depending on their engagement in horizontal R&D co-operations and different levels of appropriability conditions within the economy. It assumes firms' Cournot-Nash behavior in the choice of the optimal R&D investment level and provides empirical evidence in support of the theoretical findings using data on Spain and Germany from the Third Community Innovation Survey. Theoretical and empirical results suggest that firms' cooperative behaviour and the appropriability conditions affect the relationship between public funding for innovation and R&D investments.
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