13 - 1 copyright mcgraw-hill/irwin, 2005 technological advance u.s. r&d expenditures role of...
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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
PreviousSlide
NextSlide
EndEndShowShow
Technology,R&D, andEfficiency
13C H A P T E R
13 - 2Copyright 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
PreviousSlide
NextSlide
EndEndShowShow
TECHNOLOGICAL ADVANCE• Very Long Run• Invention
–Patent• Innovation
–Product Innovation–Process Innovation
• Diffusion• Modern View of
Technological Advance
13 - 3Copyright 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
PreviousSlide
NextSlide
EndEndShowShow
2002 Data
U.S. R&D EXPENDITURES
Development (Innovation & Imitation)
72%
6%
Basic Research
22%
Applied Research(Invention)
Source: National Science Foundation
13 - 4Copyright 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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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
13 - 5Copyright 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
PreviousSlide
NextSlide
EndEndShowShow
ROLE OF ENTREPRENEURSAND OTHER INNOVATORS
• Entrepreneurs• Intrapreneurs• Forming Start-Ups• Innovating Within
Existing Firms• Anticipating the Future• Exploiting University &
Government Scientific Research
13 - 6Copyright 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
PreviousSlide
NextSlide
EndEndShowShow
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
13 - 7Copyright 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
PreviousSlide
NextSlide
EndEndShowShow
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
Graphically...
13 - 8Copyright 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
PreviousSlide
NextSlide
EndEndShowShow
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)
A FIRM’S OPTIMAL AMOUNT OF R&D
Exp
ecte
d R
ate
of
Ret
urn
, -
r, I
nte
rest
Rat
e i
r
13 - 9Copyright 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
PreviousSlide
NextSlide
EndEndShowShow
Interest-Rate Costof Funds Rate
8%
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)
A FIRM’S OPTIMAL AMOUNT OF R&D
Exp
ecte
d R
ate
of
Ret
urn
, -
r, I
nte
rest
Rat
e i
r
i
13 - 10Copyright 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
PreviousSlide
NextSlide
EndEndShowShow
Interest-Rate Costof Funds Rate
8%
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 A FIRM’S OPTIMAL
AMOUNT OF R&D
OptimalR&D
Expenditure$60 Million
r
ir = i
13 - 11Copyright 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
PreviousSlide
NextSlide
EndEndShowShow
Exp
ecte
d R
ate
of
Ret
urn
, -
r, I
nte
rest
Rat
e i
Interest-Rate Costof Funds Rate
8%
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)
A FIRM’S OPTIMAL AMOUNT OF R&D
OptimalR&D
Expenditure$60 Million
r
ir = i
Two Important Points:•Optimal vs. Affordable R&D•Expected, not Guaranteed, Returns
13 - 12Copyright 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
PreviousSlide
NextSlide
EndEndShowShow
INCREASED PROFIT VIA INNOVATION
• Increased Revenue via Product Innovation
–Importance of Price–Unsuccessful New
Products–Product Improvements
• Reduced Cost via Process Innovation
13 - 13Copyright 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
PreviousSlide
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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
13 - 14Copyright 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
PreviousSlide
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EndEndShowShow
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
13 - 15Copyright 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
PreviousSlide
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EndEndShowShow
ROLE OF MARKET STRUCTURE
Technological Advance–Pure Competition
–Monopolistic Competition
–Oligopoly
–Pure Monopoly
13 - 16Copyright 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
PreviousSlide
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EndEndShowShow
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
13 - 17Copyright 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
PreviousSlide
NextSlide
EndEndShowShow
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
13 - 19Copyright 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
PreviousSlide
NextSlide
EndEndShowShow
The Demand for Resources
Next:
Chapter 14