Mark-ups, economies of scale and the role of knowledge spillovers in OECD industries

Using R&D-based models of economic growth as a foundation, this paper argues that market-driven knowledge creation is necessarily linked as an engine of productivity growth to economies of scale and market-power. A cost function and factor demand model is applied to a cross-country industry data set to study market-power, economies of scale and the role of knowledge in an integrated approach. Empirical results reveal the presence of market-power and economies of scale in all of the industries investigated. R&D and spillovers explain some of the productivity growth observed. Spillovers are identified as an external source of economies of scale.     

Rent Protection as a Barrier to Innovation and Growth

We build a model of R&D-based growth in which the discovery of higher-quality products is governed by sequential stochastic innovation contests. We term the costly attempts of incumbent firms to safeguard the monopoly rents from their past innovations rent-protecting activities. Our analysis (1) offers a novel explanation of the observation that the difficulty of conducting R&D has been increasing over time, (2) establishes the emergence of endogenous scale-invariant long-run innovation and growth, and (3) identifies a new structural barrier to innovation and growth. We also show that long-run growth depends positively on proportional R&D subsidies, the population growth rate, and the size of innovations, but negatively on the market interest rate and the effectiveness of rent-protecting activities. An unpublished version of this paper was circulated earlier under the title “Innovation and Rent Protection in the Theory of Schumpeterian Growth.” We thank an anonymous referee and seminar participants in several venues for useful comments and suggestions.     

Endogenous fluctuations with procyclical R&D

The literature on endogenous growth cycles predicts the countercyclical allocation of resources to R&D. However, this prediction is not supported by empirical studies. This study considers the R&D-based growth model with endogenous fluctuations introducing population growth and a negative externality that affects the productivity of R&D. We show that this simple modification makes R&D investment procyclical along sustained business cycles using both an overlapping generation framework and an infinitely-lived agent framework.     

Management Ability, Long-run Growth, and Poverty Traps

This study establishes an R&D-based growth model that includes the functional difference between labor and human capital in the production of goods. In our analysis, human capital is used by the managers in the manufacturing process. Such an allocation of human capital yields three possible steady states: endogenous growth, poverty traps, and multiple equilibria. Economies are sorted into these steady states according to the endowments of labor, human capital, and knowledge. Thus, the obtained steady states explain some economic growth patterns, such as polarization and leapfrogging of economies.     

Occupational choice and entrepreneurship: effects of R&D subsidies on economic growth

Most R&D-based growth models fail to explicitly account for the role of entrepreneurs in economic growth. By contrast, this study accounts for this factor and constructs an overlapping-generations model that includes entrepreneurial innovation and the occupational choice of becoming an entrepreneur or a worker. For the role of entrepreneurs, even a policy intended to encourage innovation can negatively affect economic growth. For the effect of such policies, I focus on the role of R&D subsidies. I show that while R&D subsidies promote entrepreneurs’ R&D activities, they increase workers’ wages by boosting labor demand. Thus, it is more attractive to be a worker, which reduces the number of entrepreneurs. Subsidies can have both a negative and positive effect on growth, which results in an inverted U-shaped relationship between R&D subsidies and growth. In addition, a growth-maximizing R&D subsidy rate exists, although this rate is too high to maximize the welfare level of any one generation. When individuals are heterogeneous in their abilities, R&D subsidies reduce intra-generational inequalities.     

Innovations,patent races and endogenous growth

This paper presents a model of innovations and endogenous economic growth with two main assumptions: first, the cost of searching for innovations differs across innovations, and second, innovations take time to find. The paper shows that given these two assumptions together, competition leads to patent races and to duplication of innovative activity. The paper then shows that duplication significantly reduces the effect of scale on growth. It also shows that competitive R&D creates too much research on easy innovations, and too little research on the difficult ones. Finally, the paper shows that risk sharing might increase duplication and reduce growth.     

Research and development,productive structure and economic effects: Assessing the role of public financing in Brazil

Investments in research and development (R&D) have played a key role in promoting productivity improvements and economic growth. This paper explores the economics effects of public R&D investment funding in Brazil, taking into account the changes in total factor productivity (TFP) in high-, medium- and low-technology sectors. Public funding plays an important role in the development of R&D activities in Brazil and its participation has increased since 2010. Our paper simulates a withdrawal of R&D investments and TFP linked to public financing from an R&D-based computable general equilibrium (CGE) model, which recognizes the stock-flow relation between R&D investment and knowledge capital. Without public R&D investment funding, the main findings indicate losses in TFP, adverse effects on the formation of physical capital, shrinkage of more intensive R&D industries, and more future dependence on the public sector for knowledge stock, especially for education.     

Learning-by-doing in R&D, knowledge threshold, and technological divide

This paper presents a simple R&D-based growth model of the “technological divide,” in which learning-by-doing (investing) in R&D and a threshold level of technological knowledge jointly determine the pattern of economic growth. Specifically, the model generates differences in the growth pattern primarily by modifying the underlying parameters that govern the evolution of economy-wide technological competence or dynamic R&D productivity. The technological divide arises at the threshold level of technological knowledge, which is largely affected by the quality of socio-technological infrastructure. Government policies aimed at enhancing the quality of socio-technological infrastructure can help countries escape from the “technology divide” trap by lowering the knowledge threshold. While the model preserves the spirit of the R&D-based endogenous growth model in the sense of its policy effects and the endogenous evolution of technological competence, the model does not need to reach the scale effect directly, where an increase in the size of an economy generates more rapid growth.     

What is the optimal rate of R&D investment to maximize productivity growth?

Governments in modern economies devote much policy attention to enhancing productivity and continue to emphasize its drivers such as investment in R&D. This paper analyzes the relationship between productivity growth and levels of R&D investments. The econometric analysis shows that more than 65 per cent of productivity growth variance is due to its dependence on gross domestic expenditure on R&D expressed as percentage of GDP (GERD). Economic analysis shows that productivity growth = f(GERD) is a concave function downwards due to diminishing returns to research investments. In addition, the research shows that the range of GERD between 2.3 per cent and 2.6 per cent maximizes the long-run impact on productivity growth and it is the key to sustained productivity and technology improvements that are becoming more and more necessary to modern economic growth.     

Do Distortionary Taxes Always Harm Growth?

This paper examines the long-run effects of capital income taxes, labor income taxes, and expenditure taxes in an R&D-based model of endogenous growth with endogenous labor supply. The main contribution of this paper is to investigate how tax effects on long-run growth are influenced by the emergence of indeterminate equilibria. Indeterminacy in this instance arises due to nonseparable preferences between consumption and leisure, in conjunction with prior distortionary taxes. In contrast to conventional wisdom, we show that higher distortionary taxes improve long-run growth, as well as social welfare, when the steady state is indeterminate.     

The role of human capital and innovation in economic development: evidence from post-Malthusian Prussia

The effect of human capital on growth involves multiple channels. On the one hand, an increase in human capital directly affects economic growth by enhancing labor productivity in production. On the other hand, human capital is an important input into R&D and therefore increases labor productivity indirectly by accelerating technological change. In addition, different types of human capital such as basic and higher education or training-on-the-job might play different roles in both production and innovation activities. We merge individual data on valuable patents granted in Prussia in the late nineteenth-century with county-level data on literacy, craftsmanship, secondary schooling, and income tax revenues to explore the complex relationship between various types of human capital, innovation, and income. We find that the Second Industrial Revolution can be seen as a transition period when it comes to the role of human capital. As in the preceding First Industrial Revolution, “useful knowledge” embodied in master craftsmen was related to innovation, especially of independent inventors. As in the subsequent twentieth century, the quality of basic education was associated with both workers’ productivity and firms’ R&D processes. In a final step, we show that literacy had also a negative effect on fertility which increased with innovation. In general, our findings support the notion that the accumulation of basic human capital was crucial for the transition to modern economic growth.     

On the impact of public policies and wage formation on business investment in research and development

Against the backdrop of mediocre growth prospects in many countries, governments should do more to promote private investment in research and development (R&D). Public fiscal policies and the characteristics of wage formation are key as they affect both the incentives that firms face and their resources. This paper studies their impact at the macro level in a panel of 14 OECD countries since 1981, while we also account for the impact of unobserved common factors like the world level of knowledge. Tax incentives, government intramural expenditures on R&D, public R&D subsidies (if they are not too low nor too high) and especially investment in tertiary education, encourage business R&D investment. Wage moderation may also contribute to innovation, but only in fairly closed economies and in economies with flexible labour markets. In highly open economies with rigid labour markets, high wage pressure promotes investment in R&D. Innovation may then be the only competitive strategy for firms.     

Validation of an R&D-based computable general equilibrium model

A computable general equilibrium (CGE) model is useful for the calculation of macroeconomic effects caused by policy impacts, but it has been considered a sticking point to evaluate how well the CGE model describes the real economy. Among various possible reasons for the difference between the standard CGE model and the real world, this paper focuses on a limited number of primary input factors and a fixed figure for the calibrated coefficient. A CGE model incorporating research and development (R&D) activity is suggested as an alternative to address the problems with the standard CGE model. The proposed model includes the following two setups: (1) a sector's own knowledge is adopted as a production factor, and (2) others' knowledge is regarded as a source of spillover effect to increase the total factor productivity (TFP) coefficient. This R&D-based CGE model is evaluated on whether its correspondence with reality is better than the standard model that omits the two setups. The two models compute baseline scenarios of South Korean economic growth from 1995 to 2010, and these results are compared to actual data. The results show that the R&D-based model fits better than the standard model in cases where the country has high TFP growth.     

Trade and firm heterogeneity in a Schumpeterian model of growth

The present paper explores the effect of trade liberalization on the level of productivity as well as the rate of productivity growth in an R&D-based model with heterogeneous firms. We introduce new and plausible features that are absent in existing studies. First, technical progress takes the form of continual quality improvement of products over time. Second, firm entry and exit are endogenously determined due to creative destruction of products. In this framework, we demonstrate that a lower transport cost or export sunk cost unambiguously reallocates resources to R&D and top-quality product industries from low-quality good industries. This means that trade liberalization increases the rate of technical progress as well as the level of manufacturing productivity. These results are found to be robust in an extended model with population growth without scale effects.     

Productivity effects of trade and product innovations: an empirical analysis for 13 OECD countries

This article distinguishes two sources of productivity increases, namely product/process innovations and trade innovations. An empirical analysis for 13 OECD countries shows that product/process innovations, represented by aggregated investments in Research and Development (R&D), are major determinants for productivity growth in large industrial countries, whereas trade innovations, represented by export intensity, seem to contribute most to productivity in trade-oriented economies. These trade innovations relate to the ability to reduce transaction costs so that these trading nations specialize in the organization of production in this era of globalization where the production chain is split up in more and more component parts.     

Anti-competitive conduct, in-house R&D, and growth

Incumbent firms have two basic possibilities to improve their competitive position in the product market: Investment in R&D and the creation of entry barriers to the disadvantage of potential rivals, e.g. through lobbying activities, campaign contributions, bribes or the adoption of incompatible technologies. This paper proposes a simple oligopoly model which raises the possibility that such anti-competitive conduct and R&D investment are complementary activities for incumbents. Consequently, an institutional framework or technological possibilities which encourage anti-competitive conduct, although impeding entry of potential rivals and accentuating standard oligopoly distortions, may foster R&D-based growth and welfare. However, this outcome is less likely if entrants exert technological spillover effects, e.g. through foreign direct investment. Stronger protection of intellectual property rights, although triggering anti-competitive conduct and thereby impeding market entry as well, is more likely to foster economic growth.     

Short-run and long-run effects of capital taxation on innovation and economic growth

In this study, we examine the effects of capital taxation on innovation and economic growth in an R&D-based growth model. We find that capital taxation has drastically different effects in the short run and in the long run. An increase in the capital income tax rate has both a consumption effect and a tax-shifting effect on the equilibrium growth rates of technology and output. In the short run, the consumption effect dominates the tax-shifting effect causing an initial negative effect of capital taxation on the equilibrium growth rates. However, in the long run, the tax-shifting effect becomes the dominant force yielding an overall positive effect of capital taxation on steady-state economic growth. These contrasting effects of capital taxation at different time horizons may provide a theoretical explanation for the mixed evidence in the empirical literature on capital taxation and economic growth.     

R&;D: A Small Contribution to Productivity Growth

In this article I evaluate the contribution of R&D investments to productivity growth. The basis for the analysis are the free entry condition and the fact that most R&D innovations are embodied. Free entry yields a relationship between the resources devoted to R&D and the growth rate of technology. Since innovators are small, this relationship is not directly affected by the size of R&D externalities, or the presence of aggregate diminishing returns in R&D after controlling for the growth rate of output and the interest rate. The embodiment of R&D-driven innovations bounds the size of the production externalities. The resulting contribution of R&D to productivity growth in the US is smaller than 3–5 tenths of 1% point. This constitutes an upper bound for the case where innovators internalize the consequences of their R&D investments on the cost of conducting future innovations. From a normative perspective, this analysis implies that, if the innovation technology takes the form assumed in the literature, the actual US R&D intensity may be the socially optimal.     

Examination and Approval of New Patents in an Endogenous Growth Model

This study introduces the examination duration for newly developed goods into a standard R&D-based growth model. Producing such goods requires approval from an authority, and their examination incurs both cost and time. Thus, there is a lag between invention and production. This study investigates the effects of reducing the examination duration on examination backlogs (the number of newly invented goods under examination), economic growth, and welfare. We obtain an inverted-U shaped relationship between backlogs and duration, because reducing the duration decreases backlogs by accelerating the examination process, but simultaneously increases backlogs by promoting R&D and increasing the number of applications. In addition, we demonstrate that reducing the examination duration promotes economic growth. However, a rather short examination duration needs considerable resources as the examination has a higher cost. Thus, an extremely short duration hurts welfare. Our numerical analysis reveals the existence of an optimal examination duration.     

Innovative growth: the role of market power and negative selection

ABSTRACT

This paper relies on register-based statistical data from Finland to measure broad research and development (R&D), organizational capital (OC) and information and communication technology (ICT) investments as innovation inputs in addition to formal survey-based R&D and CIS survey data on innovations. The linked panel data are appropriate for a comparison of low-market-share (small) and large-market-share (large) firms. We analyze the productivity growth and profitability of Finnish firms with varying market power. In contrast to high-market-share firms, low-market-share firms are characterized by low profit derived from new innovations. This study suggests that in addition to imitative growth, a ‘negative selection mechanism’ explains the high productivity growth relative to the low profits.