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Technology, R&D, and Efficiency Chapter 11 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

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Page 1: Technology, R&D, and Efficiency Chapter 11W McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved

Technology, R&D, and Efficiency

Chapter 11W

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Page 2: Technology, R&D, and Efficiency Chapter 11W McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved

Chapter Objectives

• Invention, innovation, and technological diffusion

• Furthering technological advance• Optimal amount of R&D• Benefits from innovation• Market structure and technological

advance• Technological advance and

efficiency 11W-2

Page 3: Technology, R&D, and Efficiency Chapter 11W McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved

Technological Advance

• Occurs in the very long run

• Occurs in response to incentives

• Arises from firm rivalry

• Firms seek new profit opportunities

11W-3

Page 4: Technology, R&D, and Efficiency Chapter 11W McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved

Invention-Innovation-Diffusion

• Three step process• Invention

–Patent• Innovation

–Product innovation–Process innovation

• Diffusion• Requires R&D expenditure

11W-4

Page 5: Technology, R&D, and Efficiency Chapter 11W McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved

U.S. R&D Expenditures

Source: National Science Foundation

BasicResearch

AppliedResearch

(invention)

4%

22%

74%

Development(innovation and

imitation)

Composition of business outlays 2006

11W-5

Page 6: Technology, R&D, and Efficiency Chapter 11W McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved

Source: National Science Foundation

0 1 2 3 4 5

R&D Expenditures

Total R&D expenditures as a percentageof GDP, 2006

Sweden

Japan

United States

Germany

France

Canada

United Kingdom

Italy

Russia11W-6

Page 7: Technology, R&D, and Efficiency Chapter 11W McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved

Role of Entrepreneurs

• Entrepreneurs–Bear financial risk

• Other innovators• Forming start-ups• Innovating within existing firms• Anticipating the future• Exploiting university and

government scientific research11W-7

Page 8: Technology, R&D, and Efficiency Chapter 11W McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved

Firm’s Optimal R&D Amount

• Marginal benefit and marginal cost• Sources of funds

–Bank loans–Bonds–Retained earnings–Venture capital–Personal savings

• Interest-rate cost of funds • Expected-rate-of-return

11W-8

Page 9: Technology, R&D, and Efficiency Chapter 11W McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved

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

Firm’s Optimal R&D Amount

11W-9

Page 10: Technology, R&D, and Efficiency Chapter 11W McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved

• Three important points

• Optimal vs. affordable R&D

• Expected, not guaranteed, returns

• Adjustments

Firm’s Optimal R&D Amount

11W-10

Page 11: Technology, R&D, and Efficiency Chapter 11W McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved

Increased Profits

• Increased revenue via product innovation–Importance of price

–Unsuccessful new products

–Product improvements

• Reduced cost via process innovation

11W-11

Page 12: Technology, R&D, and Efficiency Chapter 11W McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved

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

Innovation increases TP and decreases ATC

Making greater production possible at lower costs

11W-12

Page 13: Technology, R&D, and Efficiency Chapter 11W McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved

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 11W-13

Page 14: Technology, R&D, and Efficiency Chapter 11W McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved

Distribution of U.S. Patents

Source: U.S. Patent and Trademark Office

Top 10 foreign countriesNumber of U.S. patents, 1963-2006

Japan (658,827)

Germany (295,110)

U.K. (123,371)

France (110,839)

Canada (77,594)

Taiwan (58,162)

Switzerland (52,201)

South Korea (44,125)

Italy (43,668)

Sweden (38,456)

11W-14

Page 15: Technology, R&D, and Efficiency Chapter 11W McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved

0

50

100

150

200

1980 1985 1990 1995 2000 2005

U.S. R&D Expenditures

1980 - 2006

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

11W-15

Page 16: Technology, R&D, and Efficiency Chapter 11W McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved

Role of Market Structure

• Which type of market structure is best suited to technological advance–Pure competition–Monopolistic competition–Oligopoly–Pure monopoly

11W-16

Page 17: Technology, R&D, and Efficiency Chapter 11W McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved

Inverted-U Theory

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 11W-17

Page 18: Technology, R&D, and Efficiency Chapter 11W McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved

Technological Advance and Efficiency

• Productive efficiency–Increasing productivity of inputs

• Allocative efficiency–A more-preferred mix of goods and

services

• Creative destruction

11W-18

Page 19: Technology, R&D, and Efficiency Chapter 11W McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved

Key Terms

• technological advance

• 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

11W-19

Page 20: Technology, R&D, and Efficiency Chapter 11W McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved

Next Chapter Preview…

The Demand For Resources

11W-20


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