R&D policy in a vertically related industry

In this paper, we analyze the effectiveness of public policy aimed to stimulate business-performed R&D in a vertically related market. We examine the role of an R&D active upstream supplier in a four-stage R&D model, where we incorporate public funding. The considered policy instrument is direct funding of firms’ R&D efforts. We calculate the optimal policies and show that they have a positive impact on firms’ R&D investments. From a welfare point of view, it is optimal to differentiate the subsidy rates between the upstream and the downstream markets. Competition in the product market leads to a higher subsidy rate to the upstream supplier than to the downstream firms. When concentration is high in the downstream market, the optimal solution is an R&D subsidy for these firms, otherwise the optimal solution is an R&D tax for the downstream firms.     

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.     

Managerial compensation and R&D investments: the role of the external managerial labour market

This paper investigates the importance of the external managerial labour market in the determination of managerial compensation and in the influence of the compensation incentives on a firm’s R&D investments. I design an empirical model including the compensation adjustment regression, of which the focus is the role of the external labour market, and the R&D regression that examines how the compensation incentives derived from the external labour market affect a firm’s R&D intensity. Empirical results suggest that the R&D intensity is positively related to the premium of the actual pay adjustments over the expected pay adjustments based on the external labour market comparisons. The effect of the compensation incentives on the R&D investments is strongest when managers expect pay to decrease but actually experience an increase in pay.     

Market structure and R&D investment spillovers

This paper examines research and development (R&D) investment spillovers across different market structures. In particular, we extend the recent work in Matsumura et al. (2013) to incorporate R&D investment spillovers. When the market is a duopoly, noncooperative (cooperative) R&D investment is preferred for small (large) spillovers of less (more) than half. We show that as a market structure becomes more competitive, noncooperative R&D investment is more likely to be preferred. Moreover, noncooperative R&D is not always decreasing with the intensity of competition, even though it is ultimately zero with perfect competition. Our theoretical results fit well with existing empirical findings.     

Strategic Rivalry With Spillovers Within Segmented Versus Integrated Markets

We consider a two-stage game with firms investing in R&D in the first stage while competing [a] la Cournot in the second stage. The firms are located in two countries, which are either segmented or integrated. R&D spillovers occur between firms located in the same country as well as between firms located in different countries.

We first examine the consequences of market integration on the impact of national and international R&D spillovers on innovative efforts, effective R&D, profits and total welfare. Comparing the resulting equilibrium levels, we subsequently conclude that market integration always leads to higher R&D investments and output if international R&D spillovers are limited, while the welfare consequences are ambiguous. Finally, we also analyze the welfare maximization problem of a ‘constrained social planner who can only decide on the level of R&D spillovers.     

R&D competition, absorptive capacity, and market shares

This paper deals with an oligopolistic industry where firms are engaged in cost-reducting R&D activity to maximize their market shares. The existence and uniqueness of a feedback-Nash-optimal R&D strategy for each firm are discussed. Our simulations highlight that variations in spillovers hardly influence the firms' R&D investment, if their absorptive capacities to exploit extramural knowledge depend on their R&D efforts. Moreover, extramural knowledge cannot completely replace in-house R&D. However, a high level of public R&D favors the firm with the most restrictive R&D expenditure constraint and/or with the lowest initial R&D stock, provided it invests in R&D.     

中国研发投入的动态演化

R&D investment is enterprises’ strategy based on the market demand on innovative products and its production capacity for them. Enlarging market demand would spur the enterprises’ R&D input and the enhancement of technology state in production ability could have a complex effect on less developed countries’ R&D expenditure. With the measurement of China’s technology state compared to the United States and Japan, this paper explores with the state space model the dynamic effects of determinants on China’s R&D expenditure with the data during 1987–2006. The result illustrates that the growing national income, a proxy of domestic market demand, impedes the further R&D investment in China due to the enormous demand for necessities dominated by lower income class, and the income inequality is the major incentive for R&D investment via the higher pricing on the wealthy group, and that the improvement of technology state reduces the innovation risk and plays an important role in stimulating R&D expenditure.      

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.     

Too little or too much R&D?

According to the first generation models of endogenous growth based on expanding product variety, the market economy unambiguously generates too little R&D. Later, by disentangling returns to specialization from the market power parameter, it was shown that with sufficiently low returns to specialization too much R&D can occur. The present paper takes a step further, disentangling the market power parameter from the capital share in final output. At a theoretical level this helps finding too much R&D as well. On the other hand, in view of the empirically realistic order of magnitude between the parameters, disentangling market power and capital share tends to diminish the scope for excess R&D. Finally, by differentiating between net and gross returns to specialization we demonstrate what drives the differing inefficiency results in this literature.     

Strategic R&D Co-operatives

Although firms have many reasons for investing in R&D, still market forces are believed to be inadequate for directing an optimal amount of funds towards R&D investments. An important tool for diminishing this failure on markets for R&D is to sustain R&D co-operatives, a policy instrument recently (re)discovered by public authorities. For quite some time the formal economics literature did not pay substantial attention to this policy, but with the appearance of the seminal analysis of d’Aspremont & Jacquemin (1988) this silence was abruptly disturbed.The objective of the present paper is to develop a general version of the d’Aspremont & Jacquemin (1988) model which still allows for the calculation of explicit equilibria and therefore enables a comparison between co-operative and non-co-operative R&D. While pursuing this objective an analysis is presented which encompasses several recent contributions to the literature.Having established this general characterization of a market with possible strategic R&D co-operatives the arguments against and in favour of this industrial policy are evaluated. It appears that there are circumstances when these strategic alliances could indeed be socially beneficial. However there remains always the threat of firms increasing their market power by extending the co-operative agreement to the product market.     

Subsidizing cooperative and noncooperative R&D in duopoly with spillovers

Comparing the effect on private R&D investments of allowing firms to cooperate in R&D with that of providing R&D subsidies reveals that in general the latter policy is more effective than the former in promoting R&D activity. Analyzing the implementation of both policies simultaneously reveals that subsidizing cooperative and noncooperative R&D leads to the same market outcome. The preferred R&D-stimulating policy is to subsidize optimally an agreement according to which firms only share the outcomes of their independent research.     

Noncooperative versus cooperative R&D with endogenous spillover rates

This paper deals with a general version of a two-stage model of R&D and product market competition. We provide a thorough generalization of previous results on the comparative performance of noncooperative and cooperative R&D, dispensing in particular with ex-post firm symmetry and linear demand assumptions. We also characterize the structure of profit-maximizing R&D cartels where firms competing in a product market jointly decide R&D expenditure, as well as internal spillover, levels. We establish the firms would essentially always prefer extremal spillovers, and within the context of a standard specification, derive conditions for the optimality of minimal spillover.     

Indeterminate equilibrium growth with product and R&D spillovers

The paper revisits an endogenously growing economy à la Romer (1990) to explore the possibility of local and global indeterminacy where, along with the usual R&D spillover, a manufacturing sector generates a product spillover on R&D. When the product spillover facilitates R&D, the dynamic market equilibrium is unique and determinate. However, when the product spillover is strongly negative on R&D, multiple balanced market equilibria emerge and are therefore globally indeterminate. Furthermore, global indeterminacy coexists with local indeterminacy under the joint condition on the intertemporal elasticity of substitution of consumption. Local indeterminacy also emerges when the product spillover is mildly negative in tandem with a high intertemporal elasticity of substitution. Hence, a dynamic market economy with product spillovers in the R&D sector enriches the understanding of observable growth phenomena, including business and growth cycles and income and growth disparity, among countries with the same economic fundamentals.     

Value maximizing hurdle rates for R&D investment

We show that the value maximizing hurdle rate for research and development (R&D) investments among private firms operating in a market setting is less than for conventional investments despite the fact that R&D has development risk. Because development risk arises only during R&D, entrepreneurs control this risk by deferring or pursuing R&D depending upon profitability. This risk management moderates downside loss and encourages upside gain which increases the value attraction of R&D and decreases the value maximizing hurdle rate below that of conventional investment.     

R&D dynamics in the product life cycle

This paper presents a model of a firm's R&D behavior over an entire product life cycle. Beginning with the search stage, modelled as a patent race, firms raise their R&D expenditures until one firm succeeds with a technological breakthrough in creating a new product, market. The following R&D behavior of the successful entrepreneur, devoted to incremental product and process innovations, varies in a characteristic way over the new product's life cycle. Under reasonable conditions, R&D activities rise in the early stages but decline when the market matures. Overall, supply and demand factors combine to determine the R&D time-path.Paper presented at the Sixth Annual Congress of the European Economic Association, Cambridge, U.K., August 31-September 2, 1991. I would like to thank three anonymous referees for helpful comments and suggestions. Financial support of the DFG in Bonn is gratefully acknowledged.     

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.     

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.      

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.     

Competition and Persistence of R&D

This paper investigates the R&D persistence of R&D active firms in different markets with different intensities of competition, based on firm-level panel data for the period 1996–2008. In a dynamic setting of the empirical model, it turns out that persistence is strongly related to market competition (measured by the number of principal competitors). Persistence of R&D expenditures is more likely to be observed in markets with few principal competitors (between six and 10) and is very unlikely to be observed in polypolistic market types (more than 50 competitors).     

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.