Technological Advance
U.S. R&D Expenditures
Role of Entrepreneurs
and Other Innovators
A Firm’s Optimal
Amount of R&D
Increased Profit via
Innovation
26
C HAPTE R
Imitation and R&D
Incentives
Technology,
R&D, and
Efficiency
Role of Market
Structure
Inverted-U Theory
Technological Advance
and Efficiency
Key Terms
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Copyright McGraw-Hill/Irwin, 2005
TECHNOLOGICAL ADVANCE
Technological Advance
U.S. R&D Expenditures
Role of Entrepreneurs
and Other Innovators
A Firm’s Optimal
Amount of R&D
Increased Profit via
Innovation
Imitation and R&D
Incentives
Role of Market
Structure
Inverted-U Theory
Technological Advance
and Efficiency
Key Terms
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• Very Long Run
• Invention
–Patent
• Innovation
–Product Innovation
–Process Innovation
• Diffusion
• Modern View of
Technological Advance
Copyright McGraw-Hill/Irwin, 2005
U.S. R&D EXPENDITURES
Technological Advance
U.S. R&D Expenditures
Role of Entrepreneurs
and Other Innovators
A Firm’s Optimal
Amount of R&D
Increased Profit via
Innovation
Imitation and R&D
Incentives
Applied Research Basic Research
(Invention)
22%
Role of Market
Structure
6%
Development
(Innovation & Imitation)
Inverted-U Theory
Technological Advance
and Efficiency
72%
Key Terms
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2002 Data
Source: National Science Foundation
Copyright McGraw-Hill/Irwin, 2005
GLOBAL PERSPECTIVE
Technological Advance
U.S. R&D Expenditures
R&D Expenditures as a Percentage
Of GDP, Selected Nations, 2002
Role of Entrepreneurs
and Other Innovators
A Firm’s Optimal
Amount of R&D
Increased Profit via
Innovation
Imitation and R&D
Incentives
Inverted-U Theory
Technological Advance
and Efficiency
Key Terms
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1
2
3
4
Japan
United States
Germany
Role of Market
Structure
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0
France
Canada
Next
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United Kingdom
Italy
Source: National Science Foundation
Copyright McGraw-Hill/Irwin, 2005
Technological Advance
U.S. R&D Expenditures
Role of Entrepreneurs
and Other Innovators
A Firm’s Optimal
Amount of R&D
Increased Profit via
Innovation
Imitation and R&D
Incentives
Role of Market
Structure
Inverted-U Theory
Technological Advance
and Efficiency
Key Terms
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ROLE OF ENTREPRENEURS
AND OTHER INNOVATORS
• Entrepreneurs
• Intrapreneurs
• Forming Start-Ups
• Innovating Within
Existing Firms
• Anticipating the Future
• Exploiting University
and Government
Scientific Research
Copyright McGraw-Hill/Irwin, 2005
Technological Advance
U.S. R&D Expenditures
Role of Entrepreneurs
and Other Innovators
A Firm’s Optimal
Amount of R&D
Increased Profit via
Innovation
Imitation and R&D
Incentives
Role of Market
Structure
Inverted-U Theory
Technological Advance
and Efficiency
Key Terms
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A FIRM’S OPTIMAL
AMOUNT OF R&D
• Interest-Rate Cost-ofFunds
–Bank Loans
–Bonds
–Retained Earnings
–Venture Capital
–Personal Savings
• Expected Rate-of-Return
• Expected-Rate-of-ReturnCurve
Copyright McGraw-Hill/Irwin, 2005
Technological Advance
U.S. R&D Expenditures
Role of Entrepreneurs
and Other Innovators
A Firm’s Optimal
Amount of R&D
Increased Profit via
Innovation
Imitation and R&D
Incentives
Role of Market
Structure
Inverted-U Theory
Technological Advance
and Efficiency
Key Terms
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A FIRM’S OPTIMAL
AMOUNT OF R&D
• Interest-Rate Cost-ofFunds
–Bank Loans
–Bonds
–Retained Earnings
–Venture Capital
–Personal Savings
Graphically...
• Expected Rate-of-Return
• Expected-Rate-of-ReturnCurve
Copyright McGraw-Hill/Irwin, 2005
U.S. R&D Expenditures
Role of Entrepreneurs
and Other Innovators
A Firm’s Optimal
Amount of R&D
Increased Profit via
Innovation
Imitation and R&D
Incentives
Role of Market
Structure
Inverted-U Theory
Technological Advance
and Efficiency
Key Terms
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Expected Rate of Return, - r, Interest Rate i
Technological Advance
A FIRM’S OPTIMAL
AMOUNT OF R&D
Interest-Rate Cost Expected-Rate of
of Funds Rate Return Schedule
20
Exp.
R&D Ret. %
$10 18
20 16
30 14
40 12
50 10
60 8
70 6
80 4
16
12
8
4
r
0
20
40
60
R&D Expenditures
(millions of dollars)
Copyright McGraw-Hill/Irwin, 2005
80
100
U.S. R&D Expenditures
Role of Entrepreneurs
and Other Innovators
A Firm’s Optimal
Amount of R&D
Increased Profit via
Innovation
Imitation and R&D
Incentives
Role of Market
Structure
Inverted-U Theory
Technological Advance
and Efficiency
Key Terms
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Expected Rate of Return, - r, Interest Rate i
Technological Advance
A FIRM’S OPTIMAL
AMOUNT OF R&D
Interest-Rate Cost Expected-Rate of
of Funds Rate Return Schedule
20
8%
16
12
8
i
4
r
0
20
40
60
R&D Expenditures
(millions of dollars)
Copyright McGraw-Hill/Irwin, 2005
80
100
Exp.
R&D Ret. %
$10 18
20 16
30 14
40 12
50 10
60 8
70 6
80 4
U.S. R&D Expenditures
Role of Entrepreneurs
and Other Innovators
A Firm’s Optimal
Amount of R&D
Increased Profit via
Innovation
Imitation and R&D
Incentives
Role of Market
Structure
Inverted-U Theory
Technological Advance
and Efficiency
Key Terms
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Expected Rate of Return, - r, Interest Rate i
Technological Advance
A FIRM’S OPTIMAL
AMOUNT OF R&D
Interest-Rate Cost Expected-Rate of
of Funds Rate Return Schedule
20
8%
16
Optimal
R&D
Expenditure
$60 Million
12
8
i
r=i
4
r
0
20
40
60
R&D Expenditures
(millions of dollars)
Copyright McGraw-Hill/Irwin, 2005
80
100
Exp.
R&D Ret. %
$10 18
20 16
30 14
40 12
50 10
60 8
70 6
80 4
U.S. R&D Expenditures
Role of Entrepreneurs
and Other Innovators
A Firm’s Optimal
Amount of R&D
Increased Profit via
Innovation
Imitation and R&D
Incentives
Role of Market
Structure
Inverted-U Theory
Technological Advance
and Efficiency
Key Terms
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Expected Rate of Return, - r, Interest Rate i
Technological Advance
A FIRM’S OPTIMAL
AMOUNT OF R&D
Interest-Rate Cost Expected-Rate of
of Funds Rate Return Schedule
20
Exp.
R&D Ret. %
16
Optimal
$10 18
R&D
Two Important Points:
20 16
12
Expenditure
30 14
•Optimal vs. Affordable
R&D
$60 Million
40 12
8
i 50 10
•Expected,
not Guaranteed, Returns
60 8
r=i
4
70 6
80 4
8%
r
0
20
40
60
R&D Expenditures
(millions of dollars)
Copyright McGraw-Hill/Irwin, 2005
80
100
Technological Advance
U.S. R&D Expenditures
Role of Entrepreneurs
and Other Innovators
A Firm’s Optimal
Amount of R&D
Increased Profit via
Innovation
Imitation and R&D
Incentives
Role of Market
Structure
Inverted-U Theory
Technological Advance
and Efficiency
Key Terms
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INCREASED PROFIT VIA
INNOVATION
• Increased Revenue via
Product Innovation
–Importance of Price
–Unsuccessful New
Products
–Product Improvements
• Reduced Cost via
Process Innovation
Copyright McGraw-Hill/Irwin, 2005
Technological Advance
U.S. R&D Expenditures
Role of Entrepreneurs
and Other Innovators
A Firm’s Optimal
Amount of R&D
INCREASED PROFIT VIA
INNOVATION
Process innovation
yields more output
Total
Product per unit of labor
TP2
Increased Profit via
Innovation
Imitation and R&D
Incentives
2500
Role of Market
Structure
2000
And lowers the cost per
Average
unit of labor and
Total
Cost enables a greater output
TP1
ATC1
ATC2
$5
4
Inverted-U Theory
Technological Advance
and Efficiency
Key Terms
0
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1000
Units of Labor
Copyright McGraw-Hill/Irwin, 2005
0
2000 2500
Units of Output
Technological Advance
U.S. R&D Expenditures
Role of Entrepreneurs
and Other Innovators
A Firm’s Optimal
Amount of R&D
Increased Profit via
Innovation
Imitation and R&D
Incentives
Role of Market
Structure
Inverted-U Theory
Technological Advance
and Efficiency
Key Terms
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IMITATION AND R&D
INCENTIVES
Fast-Second Strategy
Benefits of Being First
• Patents
• Copyrights & Trademarks
• Brand-Name Recognition
• Trade Secrets
–Learning by Doing
• Time Lags
• Profitable Buyouts
Copyright McGraw-Hill/Irwin, 2005
ROLE OF MARKET STRUCTURE
Technological Advance
U.S. R&D Expenditures
Role of Entrepreneurs
and Other Innovators
A Firm’s Optimal
Amount of R&D
Increased Profit via
Innovation
Imitation and R&D
Incentives
Role of Market
Structure
Inverted-U Theory
Technological Advance
and Efficiency
Key Terms
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Technological Advance
–Pure Competition
–Monopolistic
Competition
–Oligopoly
–Pure Monopoly
Copyright McGraw-Hill/Irwin, 2005
INVERTED-U THEORY
Technological Advance
U.S. R&D Expenditures
Role of Entrepreneurs
and Other Innovators
Increased Profit via
Innovation
Imitation and R&D
Incentives
Role of Market
Structure
Inverted-U Theory
Technological Advance
and Efficiency
Key Terms
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MORE COMPETITION
LESS COMPETITION
R&D Expenditures
as a Percent of Sales
A Firm’s Optimal
Amount of R&D
Next
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0
25
50
75
Concentration Ratio (Percent)
Copyright McGraw-Hill/Irwin, 2005
100
Technological Advance
U.S. R&D Expenditures
Role of Entrepreneurs
and Other Innovators
A Firm’s Optimal
Amount of R&D
Increased Profit via
Innovation
Imitation and R&D
Incentives
Role of Market
Structure
Inverted-U Theory
Technological Advance
and Efficiency
TECHNOLOGICAL
ADVANCE & EFFICIENCY
• Productive Efficiency
• Allocative Efficiency
• Creative Destruction
Key Terms
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Copyright McGraw-Hill/Irwin, 2005
technological advance
very long run
invention
patent
innovation
product innovation
process innovation
diffusion
start-ups
Copyright McGraw-Hill/Irwin, Inc. 2005
venture capital
interest-rate cost-of-funds
curve
expected-rate-of-return curve
optimal amount of R&D
imitation problem
fast-second strategy
inverted-U theory of R&D
creative destruction
BACK
END
Technological Advance
U.S. R&D Expenditures
Next:
Role of Entrepreneurs
and Other Innovators
A Firm’s Optimal
Amount of R&D
Increased Profit via
Innovation
Imitation and R&D
Incentives
Role of Market
Structure
Inverted-U Theory
Technological Advance
and Efficiency
The Demand for Resources
Key Terms
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Chapter 27
Copyright McGraw-Hill/Irwin, 2005