We study investments in R&D and the formation of R&D clusters of firms

which are competitors in the market. In a three stage game, firms first decide on

the budget allocated to their R&D department, then form research clusters and

finally compete in quantities. The second stage cluster formation is modeled by

the unanimity game introduced in Bloch(1995). We show that for any distribution

of R&D investments, an equilibrium of the second stage cluster formation exists

and is generically unique up to a permutation of firms which chose the same

investment. Restricting to two investment levels in the first stage, we provide a

complete characterization of the equilibria of the three stage game. We show that

for some range of investment costs, equilibria with no-investment co-exist with

equilibria where a large fraction or even all firms invest in R&D. Furthermore, in

the high-investment equilibrium firms over{invest compared to a scenario where

research clusters are ex-ante fixed and also compared to the welfare optimum.