Chapter 13W. Technology, R&D, and Efficiency

Technology, R&D, and EfficiencyChapter 13WCopyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.Invention, Innovation, and DiffusionNew and better productsBetter ways of producing and distributing those productsOccurs over the very long runProfit is the incentiveLO1Invention, Innovation, and DiffusionShort runNo change in technology, plant, or equipmentLong runNo change in technologyVery long runTechnology changes with R&DLO1Invention, Innovation, and DiffusionInventionNew product or processBased on scientific knowledgePatent protectionInnovationProduct innovationProcess innovationCan’t be patentedLO1Invention, Innovation, and DiffusionDiffusionSpread of innovation through imitation or copyingFirms embed new innovationCrucial to capitalismRequires R&D expendituresLO1Modern View of Technological AdvanceTechnological advanceCapitalism is the driving forceProfit is the incentiveRivalry among firms is the causeStarts from within the economyInternal to capitalismOld view was a random event from outside the economyLO1Role of EntrepreneursInitiator, innovator, and risk bearerForming start-upsOther innovatorsInnovating within existing firmsAnticipating the futureExploiting university and government scientific researchLO2A Firm’s Optimal Amount of R&DMarginal benefit and marginal costInterest-rate cost-of-fundsBank loansBondsRetained earningsVenture capitalPersonal savingsInterest-rate cost-of-funds curveLO3A Firm’s Optimal Amount of R&DExpected rate of return “r”Marginal benefit from R&DExpected-rate-of-return curveSlopes downward due to diminishing returns for R&D expendituresExpected not guaranteed returnsAdjustmentsOptimal amount of R&DLO3Increased Profit via InnovationIncreased revenue via product innovationImportance of priceUnsuccessful new productsProduct improvementsReduced cost through product innovationLO4Imitation and R&D IncentivesImitation problemFast-second strategyBenefits of being firstPatents, copyrights, and trademarksBrand-name recognitionTrade secrets and learning by doingTime lagsProfitable buyoutsLO5Imitation and R&D IncentivesLO5Role of Market StructurePure competitionIncentive to innovate, but rate of return is lowMonopolistic competitionIncentive to differentiate but profits are temporaryLO6Role of Market StructureOligopolyLarge sizeAbility to finance R&DBarriers to entry can foster R&DComplacency is a negativePure monopolyLittle incentive to innovate due to strong barriers to entry protecting profitsLO6Inverted U Theory of R&DInverted U Theory of R&DFirms’ R&D spending rises with the industry concentration ratioReaches a peak at 50%Declines after 50%Empirical evidence generally supports this theoryLO6Technological Advance and EfficiencyProductive efficiencyIncreasing productivity of inputsAllocative efficiencyA more-preferred mix of goods and servicesCreative destructionLO7Decline in Federal R&D SpendingGovernment spends on basic scientific researchBenefits not realized for many yearsPrivate business prefers R&D that can be profitable quickerFederal spending on basic scientific research measured as a % of the budget has declined Now consumption spending by government is favored over investments in scientific research