1. 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

2. 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

3. 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

4. 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)

5. 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 012345 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 4.27 3.12 2.67 2.50 2.26 1.87 1.11

6. 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

7. 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

8. 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 18 16 14 12 10 8 6 4 $10 20 30 40 50 60 70 80 8888888888888888 20 16 12 8 4 0 20406080100 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

9. 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

10. Copyright 2008 The McGraw-Hill Companies 24-10 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

11. Copyright 2008 The McGraw-Hill Companies 24-11 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 2500 2000 1000 TP 1 TP 2 ATC 1 ATC 2 2000 2500 $5 0 4 0 Process Innovation Increases Total Product and Decreases ATC Making Greater Production Possible At Lower Costs

12. Copyright 2008 The McGraw-Hill Companies 24-12 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

13. Copyright 2008 The McGraw-Hill Companies 24-13 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)

14. Copyright 2008 The McGraw-Hill Companies 24-14 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, 1980 - 2005 Source: National Science Foundation Business R&D Expenditures (Billions of 2000 Dollars) Year Business R&D Expenditures

15. Copyright 2008 The McGraw-Hill Companies 24-15 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

16. Copyright 2008 The McGraw-Hill Companies 24-16 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 0257510050 Concentration Ratio (Percent) R&D Expenditures as a Percentage of Sales A “Loose” Oligopoly Supports the Optimum R&D Spending

17. Copyright 2008 The McGraw-Hill Companies 24-17 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

18. Copyright 2008 The McGraw-Hill Companies 24-18 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

19. Copyright 2008 The McGraw-Hill Companies 24-19 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

20. Copyright 2008 The McGraw-Hill Companies 24-20 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