copyright 2008 the mcgraw-hill companies 12-1 invention- innovation- diffusion r&d expenditures...
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Copyright 2008 The McGraw-Hill Companies12-1
Invention-Innovation-DiffusionR&D ExpendituresRole of EntrepreneursFirm’s Optimal R&D AmountIncreased ProfitsImitation and R&D IncentivesGrowth of Business R&DRole of Market StructureInverted-U TheoryTechnological Advance and EfficiencyLast Word
Key Terms
End Show
12Technology, R&D, and Efficiency
Copyright 2008 The McGraw-Hill Companies12-2
Invention-Innovation-DiffusionR&D ExpendituresRole of EntrepreneursFirm’s Optimal R&D AmountIncreased ProfitsImitation and R&D IncentivesGrowth of Business R&DRole of Market StructureInverted-U TheoryTechnological Advance and EfficiencyLast Word
Key Terms
End Show
Chapter Objectives• Differences Between an Invention, an
Innovation, and Technical Diffusion• How Entrepreneurs and Other
Innovators Further Technological Advance
• How a Firm Determines its Optimal Amount of Research and Development (R&D)
• Why Firms Can Benefit From Their Innovation Even Though Rivals Have an Incentive to Imitate It
• About the Role of Market Structure in Promoting Technological Advance
• How Technical Advance Enhances Productive and Allocative Efficiency
Copyright 2008 The McGraw-Hill Companies12-3
Invention-Innovation-DiffusionR&D ExpendituresRole of EntrepreneursFirm’s Optimal R&D AmountIncreased ProfitsImitation and R&D IncentivesGrowth of Business R&DRole of Market StructureInverted-U TheoryTechnological Advance and EfficiencyLast Word
Key Terms
End Show
Invention-Innovation-Diffusion• Technological Advance• Very Long Run• Invention
–Patent• Innovation
–Product Innovation–Process Innovation
• Diffusion• R&D Expenditures
Copyright 2008 The McGraw-Hill Companies12-4
Invention-Innovation-DiffusionR&D ExpendituresRole of EntrepreneursFirm’s Optimal R&D AmountIncreased ProfitsImitation and R&D IncentivesGrowth of Business R&DRole of Market StructureInverted-U TheoryTechnological Advance and EfficiencyLast Word
Key Terms
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R&D ExpendituresU.S. R&D Expenditures, 2004
Source: National Science Foundation
BasicResearch
AppliedResearch
(Invention)
4%
19%
77%
Development(Innovation and
Imitation)
Copyright 2008 The McGraw-Hill Companies12-5
Invention-Innovation-DiffusionR&D ExpendituresRole of EntrepreneursFirm’s Optimal R&D AmountIncreased ProfitsImitation and R&D IncentivesGrowth of Business R&DRole of Market StructureInverted-U TheoryTechnological Advance and EfficiencyLast Word
Key Terms
End Show
Source: National Science Foundation
0 1 2 3 4 5
R&D ExpendituresGLOBAL PERSPECTIVE
Total R&D Expenditures as a Percentageof GDP, Latest Data
Sweden
Japan
United States
Germany
France
Canada
United Kingdom
Italy
4.27
3.12
2.67
2.50
2.26
1.87
1.87
1.11
Copyright 2008 The McGraw-Hill Companies12-6
Invention-Innovation-DiffusionR&D ExpendituresRole of EntrepreneursFirm’s Optimal R&D AmountIncreased ProfitsImitation and R&D IncentivesGrowth of Business R&DRole of Market StructureInverted-U TheoryTechnological Advance and EfficiencyLast Word
Key Terms
End Show
Role of Entrepreneurs• Entrepreneurs• Other Innovators• Forming Start-Ups• Innovating Within Existing
Firms• Anticipating the Future• Exploiting University and
Government Scientific Research
Copyright 2008 The McGraw-Hill Companies12-7
Invention-Innovation-DiffusionR&D ExpendituresRole of EntrepreneursFirm’s Optimal R&D AmountIncreased ProfitsImitation and R&D IncentivesGrowth of Business R&DRole of Market StructureInverted-U TheoryTechnological Advance and EfficiencyLast Word
Key Terms
End Show
Firm’s Optimal R&D Amount• Interest-Rate Cost of Funds
–Bank Loans–Bonds–Retained Earnings–Venture Capital–Personal Savings
• Interest-Rate Cost of Funds Curve
• Expected-Rate-of-Return Curve
Copyright 2008 The McGraw-Hill Companies12-8
Invention-Innovation-DiffusionR&D ExpendituresRole of EntrepreneursFirm’s Optimal R&D AmountIncreased ProfitsImitation and R&D IncentivesGrowth of Business R&DRole of Market StructureInverted-U TheoryTechnological Advance and EfficiencyLast Word
Key Terms
End Show
Firm’s Optimal R&D Amount
18
16
14
12
10
8
6
4
$10
20
30
40
50
60
70
80
8
8
8
8
8
8
8
8
20
16
12
8
4
0 20 40 60 80 100
ExpectedRate of
Return, %R&D
Millions
InterestRate
Cost ofFunds, %
Exp
ecte
d R
ate
of
Ret
urn
, r
An
d I
nte
rest
Ra
te,
i (P
erce
nt)
Research and DevelopmentExpenditures (Millions of Dollars)
r = i i
r
Copyright 2008 The McGraw-Hill Companies12-9
Invention-Innovation-DiffusionR&D ExpendituresRole of EntrepreneursFirm’s Optimal R&D AmountIncreased ProfitsImitation and R&D IncentivesGrowth of Business R&DRole of Market StructureInverted-U TheoryTechnological Advance and EfficiencyLast Word
Key Terms
End Show
Firm’s Optimal R&D Amount• Optimal Versus Affordable
R&D• Expected, Not Guaranteed,
Returns• Adjustments
W 12.1
Copyright 2008 The McGraw-Hill Companies12-10
Invention-Innovation-DiffusionR&D ExpendituresRole of EntrepreneursFirm’s Optimal R&D AmountIncreased ProfitsImitation and R&D IncentivesGrowth of Business R&DRole of Market StructureInverted-U TheoryTechnological Advance and EfficiencyLast Word
Key Terms
End Show
Increased Profits
• Via Product Innovation–Importance of Price
–Unsuccessful New Products
–Product Improvements
• Reduced Cost Via Process Innovation
W 12.2
Copyright 2008 The McGraw-Hill Companies12-11
Invention-Innovation-DiffusionR&D ExpendituresRole of EntrepreneursFirm’s Optimal R&D AmountIncreased ProfitsImitation and R&D IncentivesGrowth of Business R&DRole of Market StructureInverted-U TheoryTechnological Advance and EfficiencyLast Word
Key Terms
End Show
Increased Profits
To
tal
Pro
du
ct
Ave
rag
e T
ota
l C
ost
Units of Labor Units of Output
2500
2000
1000
TP1
TP2
ATC1
ATC2
2000 2500
$5
0
4
0
Process Innovation IncreasesTotal Product and Decreases ATC
Making Greater Production Possible At Lower Costs
Copyright 2008 The McGraw-Hill Companies12-12
Invention-Innovation-DiffusionR&D ExpendituresRole of EntrepreneursFirm’s Optimal R&D AmountIncreased ProfitsImitation and R&D IncentivesGrowth of Business R&DRole of Market StructureInverted-U TheoryTechnological Advance and EfficiencyLast Word
Key Terms
End Show
Imitation and R&D Incentives• Imitation Problem• Fast-Second Strategy• Benefits of Being First
–Patents–Copyrights and Trademarks–Brand-Name Recognition–Trade Secrets and Learning
by Doing–Time Lags–Profitable Buyouts
Copyright 2008 The McGraw-Hill Companies12-13
Invention-Innovation-DiffusionR&D ExpendituresRole of EntrepreneursFirm’s Optimal R&D AmountIncreased ProfitsImitation and R&D IncentivesGrowth of Business R&DRole of Market StructureInverted-U TheoryTechnological Advance and EfficiencyLast Word
Key Terms
End Show
Imitation and R&D Incentives
GLOBAL PERSPECTIVE
Distribution of U.S. Patents, by Foreign Nation
Source: U.S. Patent and Trademark Office
Top 10 Foreign CountriesJapan (574,865)
Germany (221,120)
France (84,902)
U.K. (83,991)
Canada (63,994)
Taiwan (57,605)
Italy (36,883)
Switzerland (36,802)
South Korea (35,673)
Sweden (29,696)
Copyright 2008 The McGraw-Hill Companies12-14
Invention-Innovation-DiffusionR&D ExpendituresRole of EntrepreneursFirm’s Optimal R&D AmountIncreased ProfitsImitation and R&D IncentivesGrowth of Business R&DRole of Market StructureInverted-U TheoryTechnological Advance and EfficiencyLast Word
Key Terms
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0
50
100
150
200
1980 1985 1990 1995 2000 2005
Growth of Business R&DU.S. Business R&D Expenditures, 1980 - 2005
Source: National Science Foundation
Bu
sin
ess
R&
D E
xpen
dit
ure
s(B
illi
on
s o
f 20
00 D
oll
ars)
Year
Business R&DExpenditures
Copyright 2008 The McGraw-Hill Companies12-15
Invention-Innovation-DiffusionR&D ExpendituresRole of EntrepreneursFirm’s Optimal R&D AmountIncreased ProfitsImitation and R&D IncentivesGrowth of Business R&DRole of Market StructureInverted-U TheoryTechnological Advance and EfficiencyLast Word
Key Terms
End Show
Role of Market Structure• Market Structure and
Technological Advance–Pure Competition–Monopolistic Competition
–Oligopoly–Pure Monopoly
Copyright 2008 The McGraw-Hill Companies12-16
Invention-Innovation-DiffusionR&D ExpendituresRole of EntrepreneursFirm’s Optimal R&D AmountIncreased ProfitsImitation and R&D IncentivesGrowth of Business R&DRole of Market StructureInverted-U TheoryTechnological Advance and EfficiencyLast Word
Key Terms
End Show
Inverted-U TheoryR&D Spending Varies With Concentration Ratio
More Competition Less Competition
0 25 75 10050Concentration Ratio (Percent)
R&
D E
xpen
dit
ure
s as
aP
erce
nta
ge
of
Sal
es
A “Loose” Oligopoly Supports the Optimum R&D Spending
Copyright 2008 The McGraw-Hill Companies12-17
Invention-Innovation-DiffusionR&D ExpendituresRole of EntrepreneursFirm’s Optimal R&D AmountIncreased ProfitsImitation and R&D IncentivesGrowth of Business R&DRole of Market StructureInverted-U TheoryTechnological Advance and EfficiencyLast Word
Key Terms
End Show
Technological Advance and Efficiency
• Productive Efficiency–Increasing Productivity
of Inputs
• Allocative Efficiency–A More-Preferred Mix of
Goods and Services
• Creative DestructionO 12.1
Copyright 2008 The McGraw-Hill Companies12-18
Invention-Innovation-DiffusionR&D ExpendituresRole of EntrepreneursFirm’s Optimal R&D AmountIncreased ProfitsImitation and R&D IncentivesGrowth of Business R&DRole of Market StructureInverted-U TheoryTechnological Advance and EfficiencyLast Word
Key Terms
End Show
On the Path to the Personal Computer and the Internet
• Technological Advance Clearly Evident in the Development of the Personal Computer and the Internet
• Can You Cite Evidence of Creative Destruction at Work Through the Time Period?
Last
Word
Copyright 2008 The McGraw-Hill Companies12-19
Invention-Innovation-DiffusionR&D ExpendituresRole of EntrepreneursFirm’s Optimal R&D AmountIncreased ProfitsImitation and R&D IncentivesGrowth of Business R&DRole of Market StructureInverted-U TheoryTechnological Advance and EfficiencyLast Word
Key Terms
End Show
Key Terms• technological advan
ce
• very long run
• invention
• patent
• innovation
• product innovation
• process innovation
• diffusion
• start-ups
• 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
Copyright 2008 The McGraw-Hill Companies12-20
Invention-Innovation-DiffusionR&D ExpendituresRole of EntrepreneursFirm’s Optimal R&D AmountIncreased ProfitsImitation and R&D IncentivesGrowth of Business R&DRole of Market StructureInverted-U TheoryTechnological Advance and EfficiencyLast Word
Key Terms
End Show
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