Copyright 2008 The McGraw-Hill Companies 24-1 Invention- Innovation- Diffusion R&D Expenditures Role of Entrepreneurs Firm’s Optimal R&D Amount Increased Profits Imitation and R&D Incentives Growth of Business R&D Role of Market Structure Inverted-U Theory Technological Advance and Efficiency Last Word Key Terms End Show 24 Technology, R&D, and Efficiency
Copyright 2008 The McGraw-Hill Companies 24-2 Invention- Innovation- Diffusion R&D Expenditures Role of Entrepreneurs Firm’s Optimal R&D Amount Increased Profits Imitation and R&D Incentives Growth of Business R&D Role of Market Structure Inverted-U Theory Technological Advance and Efficiency Last 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 Companies 24-3 Invention- Innovation- Diffusion R&D Expenditures Role of Entrepreneurs Firm’s Optimal R&D Amount Increased Profits Imitation and R&D Incentives Growth of Business R&D Role of Market Structure Inverted-U Theory Technological Advance and Efficiency Last 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 Companies 24-4 Invention- Innovation- Diffusion R&D Expenditures Role of Entrepreneurs Firm’s Optimal R&D Amount Increased Profits Imitation and R&D Incentives Growth of Business R&D Role of Market Structure Inverted-U Theory Technological Advance and Efficiency Last Word Key Terms End Show R&D Expenditures U.S. R&D Expenditures, 2004 Source: National Science Foundation Basic Research Applied Research (Invention) 4% 19% 77% Development (Innovation and Imitation)
Copyright 2008 The McGraw-Hill Companies 24-5 Invention- Innovation- Diffusion R&D Expenditures Role of Entrepreneurs Firm’s Optimal R&D Amount Increased Profits Imitation and R&D Incentives Growth of Business R&D Role of Market Structure Inverted-U Theory Technological Advance and Efficiency Last Word Key Terms End Show Source: National Science Foundation R&D Expenditures GLOBAL PERSPECTIVE Total R&D Expenditures as a Percentage of GDP, Latest Data Sweden Japan United States Germany France Canada United Kingdom Italy
Copyright 2008 The McGraw-Hill Companies 24-6 Invention- Innovation- Diffusion R&D Expenditures Role of Entrepreneurs Firm’s Optimal R&D Amount Increased Profits Imitation and R&D Incentives Growth of Business R&D Role of Market Structure Inverted-U Theory Technological Advance and Efficiency Last 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 Companies 24-7 Invention- Innovation- Diffusion R&D Expenditures Role of Entrepreneurs Firm’s Optimal R&D Amount Increased Profits Imitation and R&D Incentives Growth of Business R&D Role of Market Structure Inverted-U Theory Technological Advance and Efficiency Last 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 Companies 24-8 Invention- Innovation- Diffusion R&D Expenditures Role of Entrepreneurs Firm’s Optimal R&D Amount Increased Profits Imitation and R&D Incentives Growth of Business R&D Role of Market Structure Inverted-U Theory Technological Advance and Efficiency Last Word Key Terms End Show Firm’s Optimal R&D Amount $ Expected Rate of Return, % R&D Millions Interest Rate Cost of Funds, % Expected Rate of Return, r And Interest Rate, i (Percent) Research and Development Expenditures (Millions of Dollars) r = i i r
Copyright 2008 The McGraw-Hill Companies 24-9 Invention- Innovation- Diffusion R&D Expenditures Role of Entrepreneurs Firm’s Optimal R&D Amount Increased Profits Imitation and R&D Incentives Growth of Business R&D Role of Market Structure Inverted-U Theory Technological Advance and Efficiency Last Word Key Terms End Show Firm’s Optimal R&D Amount Optimal Versus Affordable R&D Expected, Not Guaranteed, Returns Adjustments W 24.1
Copyright 2008 The McGraw-Hill Companies Invention- Innovation- Diffusion R&D Expenditures Role of Entrepreneurs Firm’s Optimal R&D Amount Increased Profits Imitation and R&D Incentives Growth of Business R&D Role of Market Structure Inverted-U Theory Technological Advance and Efficiency Last Word Key Terms End Show Increased Profits Via Product Innovation –Importance of Price –Unsuccessful New Products –Product Improvements Reduced Cost Via Process Innovation W 24.2
Copyright 2008 The McGraw-Hill Companies Invention- Innovation- Diffusion R&D Expenditures Role of Entrepreneurs Firm’s Optimal R&D Amount Increased Profits Imitation and R&D Incentives Growth of Business R&D Role of Market Structure Inverted-U Theory Technological Advance and Efficiency Last Word Key Terms End Show Increased Profits Total Product Average Total Cost Units of LaborUnits of Output TP 1 TP 2 ATC 1 ATC $ Process Innovation Increases Total Product and Decreases ATC Making Greater Production Possible At Lower Costs
Copyright 2008 The McGraw-Hill Companies Invention- Innovation- Diffusion R&D Expenditures Role of Entrepreneurs Firm’s Optimal R&D Amount Increased Profits Imitation and R&D Incentives Growth of Business R&D Role of Market Structure Inverted-U Theory Technological Advance and Efficiency Last 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 Companies Invention- Innovation- Diffusion R&D Expenditures Role of Entrepreneurs Firm’s Optimal R&D Amount Increased Profits Imitation and R&D Incentives Growth of Business R&D Role of Market Structure Inverted-U Theory Technological Advance and Efficiency Last 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 Countries Japan (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 Companies Invention- Innovation- Diffusion R&D Expenditures Role of Entrepreneurs Firm’s Optimal R&D Amount Increased Profits Imitation and R&D Incentives Growth of Business R&D Role of Market Structure Inverted-U Theory Technological Advance and Efficiency Last Word Key Terms End Show 2005 Growth of Business R&D U.S. Business R&D Expenditures, Source: National Science Foundation Business R&D Expenditures (Billions of 2000 Dollars) Year Business R&D Expenditures
Copyright 2008 The McGraw-Hill Companies Invention- Innovation- Diffusion R&D Expenditures Role of Entrepreneurs Firm’s Optimal R&D Amount Increased Profits Imitation and R&D Incentives Growth of Business R&D Role of Market Structure Inverted-U Theory Technological Advance and Efficiency Last 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 Companies Invention- Innovation- Diffusion R&D Expenditures Role of Entrepreneurs Firm’s Optimal R&D Amount Increased Profits Imitation and R&D Incentives Growth of Business R&D Role of Market Structure Inverted-U Theory Technological Advance and Efficiency Last Word Key Terms End Show Inverted-U Theory R&D Spending Varies With Concentration Ratio More CompetitionLess Competition Concentration Ratio (Percent) R&D Expenditures as a Percentage of Sales A “Loose” Oligopoly Supports the Optimum R&D Spending
Copyright 2008 The McGraw-Hill Companies Invention- Innovation- Diffusion R&D Expenditures Role of Entrepreneurs Firm’s Optimal R&D Amount Increased Profits Imitation and R&D Incentives Growth of Business R&D Role of Market Structure Inverted-U Theory Technological Advance and Efficiency Last 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 Destruction O 24.1
Copyright 2008 The McGraw-Hill Companies Invention- Innovation- Diffusion R&D Expenditures Role of Entrepreneurs Firm’s Optimal R&D Amount Increased Profits Imitation and R&D Incentives Growth of Business R&D Role of Market Structure Inverted-U Theory Technological Advance and Efficiency Last 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 Companies Invention- Innovation- Diffusion R&D Expenditures Role of Entrepreneurs Firm’s Optimal R&D Amount Increased Profits Imitation and R&D Incentives Growth of Business R&D Role of Market Structure Inverted-U Theory Technological Advance and Efficiency Last Word Key Terms End Show Key Terms technological advancetechnological advance very long run invention patent innovation product innovation process innovation diffusion start-ups venture capital interest-rate cost- of-funds curveinterest-rate cost- of-funds curve expected-rate-of- return curveexpected-rate-of- return curve optimal amount of R&Doptimal amount of R&D imitation problem fast-second strategyfast-second strategy inverted-U theory of R&Dinverted-U theory of R&D creative destruction
Copyright 2008 The McGraw-Hill Companies Invention- Innovation- Diffusion R&D Expenditures Role of Entrepreneurs Firm’s Optimal R&D Amount Increased Profits Imitation and R&D Incentives Growth of Business R&D Role of Market Structure Inverted-U Theory Technological Advance and Efficiency Last Word Key Terms End Show Next Chapter Preview… The Demand for Resources