In this paper we analyze an inter-temporal optimization problem of a representative

firm that invests in horizontal and vertical innovations and that faces a

constraint with respect to total R&D spending. We find that there may exist two

different steady-states of the economy when the amount of research spending falls

short of an endogenously determined threshold: one with higher productivities and

less new technologies being developed, and the other with more technologies being

created and lower productivities. Thus, a lock-in effect may arise that, however,

can be overcome by raising R&D spending sufficiently such that the steady-state

becomes unique and the firm produces the whole spectrum of available technologies.