R&D subsidies in a model of growth with dynamic market structure

This paper presents the effects of an R&D subsidy in a Schumpeterian general equilibrium model with rich industry dynamics. R&D subsidies raise the long-run growth rate, but they also raise the level of industry concentration. In the model firms compete for market share through process R&D endogenously determining the market structure within and across industries. Endogeneity of the market structure allows for analysis of changes in the moments of the firm size distribution in response to policy. R&D subsidies primarily benefit large incumbent firms who increase their innovation rates creating a greater technological barrier to entry. Concentration increases with fewer firms and a higher variance in the market shares. In general equilibrium, the greater distortions in the product market cause the wage rate to fall which leads to increased turnover rates. In addition, the analysis demonstrates that the model captures a large number of empirical regularities described in the industrial organization literature, but absent from most endogenous growth models. These features, such as entering firms are small relative to incumbents, the hazard rate of exit is negatively related to firm size, and large firms spend more on R&D than small firms play important roles in understanding the impact of R&D subsidies on the economy.     

Knowledge appropriability, firm size, and growth

Empirical evidence shows that the number of patents per R&D dollar declines with firm size. In this paper, we propose a Schumpeterian growth model that accounts for this evidence. We analyze an economy with firms that engage in cost-reducing innovation resulting from the accumulation of both codified and tacit knowledge: the former occurs through the purchase of patents, while the latter is the result of R&D conducted in-house by firms. We study the relation between knowledge appropriability and market structure, and we show that a shift from patents to in-house research occurs as firm size gets larger. Since innovation statistics concentrate mainly on patents, this process of research reallocation results into an under-estimation of innovative activity and is responsible for the declining ratio of patents to R&D expenditure. Survey data on UK-based firms provide support to our results.     

Property rights protection and corporate R&D: Evidence from China

Following the recent literature on institutions and economic growth, we examine the effects of property rights protection on corporate R&D. Using a unique 2003 World Bank survey of over 2400 firms in 18 Chinese cities, we obtain the following findings: (1) property rights protection is positively and significantly related to corporate R&D activity (for both process and product R&D); (2) government services and helping hand are conducive to corporate R&D, while informal payments to government officials are not; and (3) government ownership of firms and direct appointment of CEOs are negatively associated with corporate R&D activities. We also find that corporate R&D is positively related to firm size, and access to finance, but negatively related to product market competition and firm age.     

R&D expenditures and firm growth – is small beautiful?

ABSTRACT

This paper examines how efficiently different groups of firms use their R&D expenditures. To this end, it investigates how the empirical relationship between firms' R&D expenditures and their sales growth varies with different values of firm size, firm age, and the number of firms in the respective industry. Using panel data for Switzerland ranging from 1995 to 2012, the paper finds that smaller, more mature firms show a more positive relation between R&D expenditures and sales growth than both relatively larger or younger firms. The paper argues that, on the one hand, these firms can benefit from various small size advantages in the R&D process, such as more motivated researchers, caused by a stronger connection to the firm's fate. On the other hand, these firms can also benefit from a well-established R&D department that allows absorbing the latest technological developments. The paper further finds that industries consisting of many small firms show a more positive relation between R&D expenditures and sales growth than industries consisting of only a few large firms. The intuition behind this result is that industries consisting of many small firms imply more independent innovative trials, which then together result in a higher probability of discovering successful innovations. In sum, the paper finds that groups consisting of a large number of small, more mature firms spend their R&D in the most efficient way.     

An Empirical Evaluation of The Effects of R&D Subsidies

R&D subsidies are a common tool of technology policy, but little is known about the effects they have on the behavior of firms. This paper presents evidence on the effects that R&D subsidies have on the R&D effort of recipients, and on the probability that a firm will participate in a program granting R&D subsidies. The empirical model consists of a system of equations: a participation equation; and an R&D effort equation. Endogeneity of public funding is controlled for. Estimates are obtained with a cross-section sample of Spanish firms. The main findings are that: 1) small firms are more likely to obtain a subsidy than large firms, probably reflecting one of the public agency's goals; 2) overall, public funding induces more private effort, but for some firms (30% of participants) full crowding out effects cannot be ruled out, and 3) firm size remains related to effort, whether or not a firm gets public funding.     

Racing in two dimensions

In this paper we study an industry in which there is an ongoing sequence of R&D races between two firms. Firms are engaged in product innovation. Products are horizontally and vertically differentiated. There are two key characteristics/dimensions to products, and the level at which these are embodied in products can be increased by R&D. At each time firms can spend R&D on improving their product in one or both dimensions. We allow the possibility of economies scope — so R&D undertaken in one dimension can spillover to the other. The question we are interested in is whether a firm that is ahead in a single dimension but behind in another will focus all its R&D effort in the area in which it is ahead (product specialisation), or whether it will try to do R&D in both dimensions in the hope that it might get ahead in both and end up with a superproduct that dominates in both characteristics. The outcome of this R&D competition determines a Markov transition probability matrix determining the evolution of the industry. We show that when the R&D technology is characterized by constant returns then the only steady-state outcome is one in which the economy stays forever in a position in which one firm produces a super-product and the other gives up doing R&D altogether. This outcome is unaffected by the degree of economies of scope. When the R&D technology is characterised by decreasing returns, then the industry will visit all states and so will exhibit both product specialisation and superproduct dominance at various times. Now the extent of economies of scope matters and we show that the greater the extent of economies of scope, the less likely is the industry to exhibit product dominance, and the more likely it is to exhibit product specialisation.     

Process R&;D and Product Line Deletion by a Multiproduct Monopolist

Relative to single-product firms, a multiproduct monopolist can internalize the negative externalities of its R&D investments (the ``cannibalization effect') in two ways: (1) To lower R&D investment for each product; and (2) To delete some of its product lines so as to enlarge the market size for the remaining lines. It is shown that line deletion is profitable if products are close substitutes. If products are not close substitutes, the multiproduct monopolist keeps all product lines and invests less in cost-reducing R&D than single-product firms engaging in Cournot competition with product differentiation. However, it invests more in R&D than single-product firms if there are significant economies of scope in R&D, or if the oligopolistic firms can cooperate in their R&D decisions.      

A simple theory and evidence on the determinants of firm R&D

This paper derives a simple, but informative, model of firm R&D to figure out key factors that determine firm R&D effort. The model suggests a demand-pull, technology-push theory of R&D by showing that a firm's profit-maximizing R&D expenditure is determined jointly by both demand-side factors and technology-side factors. The former includes demand size (firm sales) and consumer preference over quality and price and the latter includes R&D cost structure or the production-cost effect of product R&D and firm-specific technological competence. In addition, the model shows that other things being equal, the stock of exogenous technological knowledge, including the firm's previously accumulated technological knowledge, relevant to current R&D which is negatively related with current R&D effort. An empirical analysis of firm R&D intensities and technological capabilities of more than 1600 firms in nine industries across six countries provides supportive evidence for the theory. Further, the theory implies that R&D intensity or the R&D-to-sales ratio is independent of firm size unless firm size affects technological competence and that given consumer preference and R&D cost structure facing all firms in the same industry, the distribution of firm-specific technological competence among firms determines the distribution of firm R&D intensities within the industry.     

Firm's objective function and product and process R&D

Firms undertake different kinds of R&D activities. They do product R&D (R&D aimed at improving the quality of existing products, and creating new products). They also do process R&D (R&D aimed at lowering the cost of making existing and new products). Moreover, firms often do both product and process R&D simultaneously. As far as the objective of firms is concerned, this need not be limited to profit-maximization only. Rather, firms may have a broader objective, where they care about profits as well as consumer surplus. This paper studies effects of a firm having a general objective function (that takes into consideration both profits and consumer surplus) on its product and process R&D choices, and corresponding implications.I consider product and process R&D choices of firms in an infinite horizon set-up with discrete time. Firms in my framework can simultaneously do both product and process R&D in every period, face a discrete-choice model of consumer demand with vertical product differentiation, and maximize a discounted, weighted sum of their profits and consumer surplus over the infinite time horizon.I show how process and product R&D differ from each other in my framework, and the role of a firm's objective function in this regard. I compare process and product R&D choices across firms that differ in their objective function, and illustrate effects of providing general R&D subsidies (subsidies given for any R&D, regardless of whether it is product or process R&D) to firms. I also characterize how in my framework, the choice of process R&D in total R&D — R&D composition — by an individual firm varies over time, and how process and product R&D choices, process and product R&D productivity, and the choice of R&D composition vary across firms that differ in size but are otherwise similar.     

R&D and productivity growth: Evidence from the UK

Although the econometric evaluation of R&D has attracted wide interest in many countries, it has not attracted much in the UK. The main objective of this paper is to fill this void, i.e., to estimate the impact of R&D on productivity growth of the UK manufacturing sector. However, there are some additional objectives. Firstly, we estimate the impact of R&D on productivity growth of large and small firms and we discuss a number of theoretical arguments regarding the role of firm size. Secondly, given that the technological infrastructure influences the innovative capacity of a firm, we compare the impact of R&D on productivity growth of high-tech firms with the corresponding impact on productivity growth of low-tech firms. Thirdly, we investigate whether the contribution of R&D to productivity growth has changed over time.

Based on firm-level data (78 firms, 1989–2002), we find that the contribution of R&D is approximately 0.04. Although the R&D-elasticity of large firms (0.044) is higher than the corresponding elasticity of small firms (0.035), the difference is small. In contrast, the R&D-elasticity is considerably high for high-tech sectors (0.11), but statistically insignificant for low-tech sectors. Finally, the investigation of the elasticity of R&D over time revealed an interesting discontinuity showing that although until 1995 the R&D-elasticity was approximately zero, after 1995 it increased dramatically to 0.09. We investigate the potential causes of such non-linearity and we suggest a number of possible explanations.     

Product differentiation, process R&D, and the nature of market competition

We investigate the relationship between process and product R&D and compare the incentives for both types of R&D under different modes of market competition (Bertrand versus Cournot). It is shown that: (i) process R&D investments increase with the degree of product differentiation and firms invest more in product R&D when they can do process R&D than when they cannot; (ii) Bertrand firms have a stronger incentive for product R&D whereas Cournot firms invest more in process R&D; and (iii) cooperation in product R&D promotes both types of R&D relative to competition whereas cooperation in both types of R&D discourages R&D relative to cooperation in just product R&D.     

Composition of R&D expenditures and firm performance

ABSTRACT

The explosion of research and development (R&D) expenditures in China brings a puzzling fact that the proportion of research in R&D is extremely small, and thus the proportion of development is large. This article distinguishes research from development in R&D and investigates the heterogeneous effects of the two components on the performance of Chinese listed firms. Using a generalized propensity score matching approach with continuous treatments, we present non-linear relationships between R&D composition and firm performance. While development-oriented firms benefit more from an increase in profit than a growth in productivity, orientation toward research contributes more to productivity gains than to profitability. Research and development activities are found to be complementary in promoting firm performance. The results suggest the existence of optimal proportions of the components of R&D for maximizing firm performance.     

Effects of coordinated strategies on product and process R&;D

Using a game theoretical model on firms’ simultaneous investments in product and process R&D, we advance and empirically test hypotheses on the role of externalities on the optimal R&D portfolio of cooperating firms and independently competing firms. We use Community Innovation Survey data on 3,696 Italian manufacturing firms. In line with our model we find that members of a group of firms invest significantly more into product, process, and aggregate R&D than independent firms. Further, their R&D portfolios tend to show a higher product versus process ratio. However, with regard to R&D performance and efficiency we find that independent firms are superior.      

R&D competition between public and private sectors

We investigate a mixed market where a welfare-maximizing public research institute competes against profit-maximizing private firms. We investigate R&D competition by using a standard model of patent races where each firm chooses both its innovation size and R&D expenditure. We find that the innovation size (R&D expenditure) chosen by the public institute is too small (too large) from the viewpoint of social welfare, respectively, and so the government should control the public institute appropriately. We also discuss the welfare implications of privatization of public research institutes.     

STRATEGIC R&D AND NETWORK COMPATIBILITY

We analyse the effects of network externalities in strategic R&D competition. We present a model of two firms competing with R&D investments and prices in a differentiated consumer market. Buyers form firm-specific networks which can be compatible. A high degree of compatibility and large spillovers moderate price competition due to weak strategic value of firm-specific networks and R&D investments, respectively. Asymmetry in product qualities brings out network effects that cancel out in conventional symmetric settings. The lower quality firm increases R&D and decreases its price as spillovers or network compatibility is increased. This happens when R&D and firm-specific network size have high strategic value.     

Multinationals,R&D and Endogenous Productivity Asymmetries

We analyze the influence of endogenous productivity asymmetries between firms, in terms of competitiveness and size, on multinational activity. In the model, productivity depends on cost-reducing R&D (research and development). We show that when firms differ on commitment power in R&D, the R&D leader, independently of being a multinational or a domestic firm, tends to invest more in R&D than the R&D follower. Because of these productivity advantages, the R&D leader can more easily become multinational. Therefore, in addition to the proximity-concentration trade-off, we identify another FDI (foreign direct investment) determinant: technological competition.     

Stochastic innovation and product market organization

Summary This paper analyzes how different types of product market organization affect firms' R&D investments in a stochastic innovation framework. Product market competition determines payoffs to successful and unsuccessful firms. Restrictions on the research project success probability distribution are identified that yield an invariance result for expenditure per R&D project. The impact of the number of firms (n) on the amount of market R&D is shown to be sensitive to product market organization. For a major process innovation, firms undertake more R&D projects under Cournot product market competition than under Bertrand competition, forn sufficiently large. A numerical example is used to illustrate welfare tradeoffs.Tom Lyon, Herman Quirmbach, Ferenc Szidarovszky, Mark Walker and two anonymous referees gave us helpful comments and suggestions on prior versions of this paper. Lucy Atkinson provided expert research assistance on numerical computations. Special thanks to Ted Bergstrom who gave us valuable suggestions about the first proposition.     

Nonparametric quantile regression analysis of R&D-sales relationship for Korean firms

This paper applies the nonparametric quantile regression estimation procedure to the analysis of the innovation-firm size relationship using Korean manufacturing firms data. Due to the high asymmetric distribution of R&D expenditure, the mean regression does not capture properly the stylized facts of R&D behavior; hence it underestimates the sales elasticity. Comparing the parametric estimates and nonparametric estimates allows us to see that there exists a nonlinear relationship in innovative activity and sales. Dividing the data into three groups according to the sales volume, the elasticity in the medium-sized firms is the biggest for scientific firms. This result conforms that the findings of Scherer (1965) coincide with findings from Korean manufacturing firms data in the sense that R&D expenditure tends to increase faster than firm size with size up to a point and then more slowly among larger firms. For the non-scientific firms, it steadily increases showing increasing returns to scale in innovative activity in large firms.     

How effective are level-based R&D tax credits? Evidence from the Netherlands

This article examines the impact of the R&D fiscal incentive programme on R&D by Dutch firms. Taking a factor demand approach, we measure the elasticity of firm R&D capital accumulation to its user cost. Econometric models are estimated using a rich unbalanced panel of firm data covering the period 1996 to 2004 with firm specific R&D user costs varying with tax incentives. Using the estimated user cost elasticity, we perform a cost–benefit analysis of the R&D incentive programme. We find some evidence of additionality suggesting that the level based programme of R&D incentives in the Netherlands is effective in stimulating firms’ investment in R&D. However, the hypothesis of crowding out can be rejected only for small firms. The analysis also indicates that the level based nature of the fiscal incentive scheme leads to a substantial social deadweight loss.     

Impact of firm size and industry type on R&D efficiency throughout innovation and commercialisation stages: evidence from Korean manufacturing firms

Technological innovation through R&D is a critical element in enhancing and fostering firm performance. In particular, measurement of R&D efficiency throughout the innovation and commercialisation stages is important. However, almost of R&D efficiency-related studies assumed that R&D is a single stage. This study aims at analysing relative efficiency scores throughout the stages of the R&D process using a two-stage data envelopment analysis (DEA) model with a sample of 1039 Korean manufacturing firms. Based on our preliminary results, this study was extended by comparing subsample groups categorised by firm size and industry type. The key findings include: (1) firms show imbalanced R&D efficiency throughout the two stages and (2) R&D efficiency is different by firm size and industry type. The empirical results and findings may assist policy- and decision-makers to enhance R&D efficiency at the firm level. Moreover, introduction of the two-stage DEA model and comparative analysis methods to firm-level data contributes to scholars.