We show the effects of entry by a non‐innovating firm on the innovating firms' incentive for undertaking cooperative R&D, highlighting the implications of knowledge spillover. Entry by a non‐innovating firm may either increase or decrease the incentive for cooperative R&D compared with no entry, depending on the innovating and the non‐innovating firms' gains from knowledge spillover. The entry deterrence motive, which has so far been ignored in the literature, plays an important role in determining R&D organization in our analysis.