This paper provides an overview on features of product innovation performed by the Japanese private sector, and proposes a dynamic estimation model to capture such features. Recent survey data imply that Japanese private firms strategically engage in their innovative activities. They also indicate the presence of spillovers in the innovative activities, which may well justify the policy intervention on innovation activities in the private sector. We particularly focus on the role of public subsidies, and propose a new analytical framework to quantify the effect of the policy on innovative activities. The suggested model incorporates a Markov perfect equilibrium with a particular attention to firms' strategic interactions and spillovers in their product innovation. The agenda for future research is also discussed.
