2. 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 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 Previous Slide Next Slide End Show Technology, R&D, and Efficiency 13 C H A P T E R

3. 13 - 2 Copyright 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 Previous Slide Next Slide End Show TECHNOLOGICAL ADVANCE Very Long Run Invention –Patent Innovation –Product Innovation –Process Innovation Diffusion Modern View of Technological Advance

4. 13 - 3 Copyright 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 Previous Slide Next Slide End Show 2002 Data U.S. R&D EXPENDITURES Development (Innovation & Imitation) 72% 6% Basic Research 22% Applied Research (Invention) Source: National Science Foundation

5. 13 - 4 Copyright 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 Previous Slide Next Slide End Show 0 1 2 3 4 Japan United States Germany France Canada United Kingdom Italy GLOBAL PERSPECTIVE R&D Expenditures as a Percentage Of GDP, Selected Nations, 2002 Source: National Science Foundation

6. 13 - 5 Copyright 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 Previous Slide Next Slide End Show ROLE OF ENTREPRENEURS AND OTHER INNOVATORS Entrepreneurs Intrapreneurs Forming Start-Ups Innovating Within Existing Firms Anticipating the Future Exploiting University & Government Scientific Research

7. 13 - 6 Copyright 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 Previous Slide Next Slide End Show 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

8. 13 - 7 Copyright 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 Previous Slide Next Slide End Show 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...

9. 13 - 8 Copyright 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 Previous Slide Next Slide End Show Interest-Rate Cost of Funds Rate Expected-Rate of Return Schedule R&D $10 20 30 40 50 60 70 80 Exp. Ret. % 18 16 14 12 10 8 6 4 20 16 12 8 4 020406080100 R&D Expenditures (millions of dollars) A FIRM’S OPTIMAL AMOUNT OF R&D Expected Rate of Return, - r, Interest Rate i r

10. 13 - 9 Copyright 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 Previous Slide Next Slide End Show Interest-Rate Cost of Funds Rate 8% Expected-Rate of Return Schedule R&D $10 20 30 40 50 60 70 80 Exp. Ret. % 18 16 14 12 10 8 6 4 20 16 12 8 4 020406080100 R&D Expenditures (millions of dollars) A FIRM’S OPTIMAL AMOUNT OF R&D Expected Rate of Return, - r, Interest Rate i r i

11. 13 - 10 Copyright 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 Previous Slide Next Slide End Show Interest-Rate Cost of Funds Rate 8% Expected-Rate of Return Schedule R&D $10 20 30 40 50 60 70 80 Exp. Ret. % 18 16 14 12 10 8 6 4 20 16 12 8 4 020406080100 R&D Expenditures (millions of dollars) Expected Rate of Return, - r, Interest Rate i A FIRM’S OPTIMAL AMOUNT OF R&D Optimal R&D Expenditure $60 Million r i r = i

12. 13 - 11 Copyright 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 Previous Slide Next Slide End Show Expected Rate of Return, - r, Interest Rate i Interest-Rate Cost of Funds Rate 8% Expected-Rate of Return Schedule R&D $10 20 30 40 50 60 70 80 Exp. Ret. % 18 16 14 12 10 8 6 4 20 16 12 8 4 020406080100 R&D Expenditures (millions of dollars) A FIRM’S OPTIMAL AMOUNT OF R&D Optimal R&D Expenditure $60 Million r i r = i Two Important Points: Optimal vs. Affordable R&D Expected, not Guaranteed, Returns

13. 13 - 12 Copyright 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 Previous Slide Next Slide End Show INCREASED PROFIT VIA INNOVATION Increased Revenue via Product Innovation –Importance of Price –Unsuccessful New Products –Product Improvements Reduced Cost via Process Innovation

14. 13 - 13 Copyright 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 Previous Slide Next Slide End Show INCREASED PROFIT VIA INNOVATION TP 1 TP 2 ATC 2 ATC 1 $5 4 Total Product Average Total Cost Units of Labor Units of Output 0 0 2000 2500 Process innovation yields more output per unit of labor 100020002500 And lowers the cost per unit of labor and enables a greater output

15. 13 - 14 Copyright 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 Previous Slide Next Slide End Show IMITATION AND R&D INCENTIVES Fast-Second Strategy Benefits of Being First Patents Copyrights & Trademarks Brand-Name Recognition Trade Secrets –Learning by Doing Time Lags Profitable Buyouts

16. 13 - 15 Copyright 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 Previous Slide Next Slide End Show ROLE OF MARKET STRUCTURE Technological Advance –Pure Competition –Monopolistic Competition –Oligopoly –Pure Monopoly

17. 13 - 16 Copyright 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 Previous Slide Next Slide End Show INVERTED-U THEORY MORE COMPETITION LESS COMPETITION R&D Expenditures as a Percent of Sales Concentration Ratio (Percent) 0 25 50 75 100

18. 13 - 17 Copyright 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 Previous Slide Next Slide End Show TECHNOLOGICAL ADVANCE & EFFICIENCY Productive Efficiency Allocative Efficiency Creative Destruction

19. 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 ENDBACK Copyright McGraw-Hill/Irwin, 2005

20. 13 - 19 Copyright 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 Previous Slide Next Slide End Show The Demand for Resources Next: Chapter 14