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

long-term R&D investment, then form research clusters according to the unanim-

ity game introduced in Bloch(1995), and finally compete in quantities. For some

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

where a large fraction of firms invest in R&D. Because of the effects of R&D

investment on cluster membership, firms tend to over-invest compared to a sce-

nario where research clusters are ex-ante fixed and also compared to the welfare

optimum.