13 - 1 Copyright McGraw-Hill/Irwin, 2005 Technological Advance U.S. R&D Expenditures Role of Entrepreneurs and Other Innovators A Firm’s Optimal Amount

13 - 1Copyright 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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Technology,R&D, andEfficiency

13C H A P T E R









Inverted-U Theory


Key Terms

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TECHNOLOGICAL ADVANCE• Very Long Run• Invention

–Patent• Innovation

–Product Innovation–Process Innovation

• Diffusion• Modern View of










Inverted-U Theory


Key Terms

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2002 Data

U.S. R&D EXPENDITURES

Development (Innovation & Imitation)

72%

6%

Basic Research

22%

Applied Research(Invention)

Source: National Science Foundation









Inverted-U Theory


Key Terms

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0 1 2 3 4

Japan

United States

Germany

France

Canada

United Kingdom

Italy

GLOBAL PERSPECTIVER&D Expenditures as a PercentageOf GDP, Selected Nations, 2002

Source: National Science Foundation









Inverted-U Theory


Key Terms

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ROLE OF ENTREPRENEURSAND OTHER INNOVATORS

• Entrepreneurs• Intrapreneurs• Forming Start-Ups• Innovating Within

Existing Firms• Anticipating the Future• Exploiting University &

Government Scientific Research









Inverted-U Theory


Key Terms

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A FIRM’S OPTIMAL AMOUNT OF R&D

• Interest-Rate Cost-of-Funds–Bank Loans–Bonds–Retained Earnings–Venture Capital–Personal Savings

• Expected Rate-of-Return• Expected-Rate-of-Return-

Curve









Inverted-U Theory


Key Terms

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• Interest-Rate Cost-of-Funds–Bank Loans–Bonds–Retained Earnings–Venture Capital–Personal Savings

• Expected Rate-of-Return• Expected-Rate-of-Return-

Curve

Graphically...









Inverted-U Theory


Key Terms

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Interest-Rate Costof Funds Rate

Expected-Rate ofReturn Schedule

R&D$1020304050607080

Exp. Ret. %

1816141210864

20

16

12

8

4

0 20 40 60 80 100

R&D Expenditures (millions of dollars)


Exp

ecte

d R

ate

of

Ret

urn

, -

r, I

nte

rest

Rat

e i

r









Inverted-U Theory


Key Terms

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8%


R&D$1020304050607080

Exp. Ret. %

1816141210864

20

16

12

8

4

0 20 40 60 80 100



Exp

ecte

d R

ate

of

Ret

urn

, -

r, I

nte

rest

Rat

e i

r

i









Inverted-U Theory


Key Terms

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8%


R&D$1020304050607080

Exp. Ret. %

1816141210864

20

16

12

8

4

0 20 40 60 80 100


Exp

ecte

d R

ate

of

Ret

urn

, -

r, I

nte

rest

Rat

e i A FIRM’S OPTIMAL

AMOUNT OF R&D

OptimalR&D

Expenditure$60 Million

r

ir = i









Inverted-U Theory


Key Terms

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Exp

ecte

d R

ate

of

Ret

urn

, -

r, I

nte

rest

Rat

e i


8%


R&D$1020304050607080

Exp. Ret. %

1816141210864

20

16

12

8

4

0 20 40 60 80 100



OptimalR&D

Expenditure$60 Million

r

ir = i

Two Important Points:•Optimal vs. Affordable R&D•Expected, not Guaranteed, Returns









Inverted-U Theory


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









Inverted-U Theory


Key Terms

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INCREASED PROFIT VIA INNOVATION

TP1

TP2

ATC2

ATC1

$54

TotalProduct

AverageTotalCost

Units of Labor Units of Output

00

2000

2500

Process innovationyields more outputper unit of labor

1000 2000 2500

And lowers the cost perunit of labor and

enables a greater output









Inverted-U Theory


Key Terms

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IMITATION AND R&D INCENTIVES

Fast-Second StrategyBenefits of Being First• Patents• Copyrights & Trademarks• Brand-Name Recognition• Trade Secrets

–Learning by Doing• Time Lags• Profitable Buyouts









Inverted-U Theory


Key Terms

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ROLE OF MARKET STRUCTURE

Technological Advance–Pure Competition

–Monopolistic Competition

–Oligopoly

–Pure Monopoly









Inverted-U Theory


Key Terms

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INVERTED-U THEORY

MORE COMPETITION LESS COMPETITIONR

&D

Ex

pe

nd

itu

res

as

a P

erc

en

t o

f S

ale

s

Concentration Ratio (Percent)0 25 50 75 100









Inverted-U Theory


Key Terms

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TECHNOLOGICAL ADVANCE & EFFICIENCY

• Productive Efficiency

• Allocative Efficiency

• Creative Destruction

technological advancevery long runinventionpatentinnovationproduct innovationprocess innovationdiffusionstart-ups

venture capitalinterest-rate cost-of-funds

curveexpected-rate-of-return curveoptimal amount of R&Dimitation problemfast-second strategyinverted-U theory of R&Dcreative destruction

ENDBACKCopyright McGraw-Hill/Irwin, 2005









Inverted-U Theory


Key Terms

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The Demand for Resources

Next:

Chapter 14

Documents

13 - 1 Copyright McGraw-Hill/Irwin, 2005 Technological Advance U.S. R&D Expenditures Role of Entrepreneurs and Other Innovators A Firm’s Optimal Amount