This paper develops a model of strategic interaction in r&d internationalization decisions between two multinational firms, competing both abroad and in their home markets. It examines different incentives for foreign r&d faced by a technology leader and a technology laggard. The model takes into account the impact of local inter firm r&d spillovers, (noncostless) international intra firm transfer of knowledge, and the notion that internal r&d increases the effectiveness of incoming spillovers. Analytical results suggest that greater efficiency of intra firm transfers and greater r&d spillovers increase the attractiveness of domestic r&d for the technology leader if the technology gap with the laggard is large. The lagging firm, in contrast, increases the share of foreign r&d as foreign technology sourcing becomes more effective. Competition encourages the leading firm to engage in foreign r&d to capture a larger share of profits on the foreign market, whereas the laggard concentrates more r&d at home to defend its home market position.