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 An unpublished version of this paper was circulated earlier under the title “Innovation and Rent Protection in the Theory of Schumpeterian Growth.”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.     

The dynamic effects of general purpose technologies on Schumpeterian growth

General purpose technologies (GPTs) are drastic innovations characterized by pervasiveness in use and innovational complementarities. The dynamic effects of a GPT are analyzed within a quality-ladders model of scale-invariant Schumpeterian growth. The diffusion path of a GPT across a continuum of industries is governed by S-curve dynamics. The model generates a unique, saddle-path long-run equilibrium. Along the transition path, the measure of industries that adopt the new GPT increases, consumption per capita falls, and the interest rate rises. The growth rate of the stock market depends negatively on the rate of GPT diffusion and the magnitude of the GPT-ridden R&D productivity gains; and positively on the rate of population growth. It also follows a U-shaped path during the diffusion process of the new GPT. Finally, the model generates transitional growth cycles of per capita GNP.JEL Classification: E3, O3, O4I would like to thank Elias Dinopoulos for encouragement, and for constructive comments and suggestions. I would also like to thank David Figlio, Douglas Waldo, Steven Slutsky and participants in the 9th Biennial Congress of the International Schumpeter Society for useful discussions and suggestions. Any remaining errors are my own responsibility.     

How do housing cycles influence listed firms’ R&D investment: evidence from the collateral channel

ABSTRACT

Firm innovation is essential to long-run economic growth. Financially constrained R&D firms may use firm-owned properties as collateral to finance their R&D projects. Therefore, the housing price cycle can affect firms’ R&D investment through influencing their real estate value. By examining listed R&D firms during the housing boom period 2002–2006 in the U.S., we find that a $1 increase in real estate value leads a firm to increase its R&D investment by $0.38. We also find that this collateral effect is more pronounced among financially constrained R&D firms than that among unconstrained ones. Additionally, we examine the housing bust period 2008–2012, and find that real estate depreciation retarded R&D investment, especially among constrained R&D firms.     

Terrorism and its impact on economic growth and technological innovation

Recent terrorist acts, in particular the 9-11 attacks in 2001, have created disruptions in the global economy. The short-term impact had been felt in the global tourism, airline industries, as well as the financial markets. While the global economy has recovered and is adjusting to the new global realities, the longer-term impact of heightened security risk across the world can be felt in the form of higher risk premiums in asset markets, as well as a shift of resources towards dealing with terrorism. Just as World War II had accelerated the development of nuclear energy as well as a major contributing factor in the genesis of Silicon Valley, the current war against terrorism will affect both the pace and trajectory of technology trends, as efforts are focused on developing technologies to combat terrorism. In this paper, we review the effects of the current war on terrorism in terms of its impact on the economy, the allocation of resources to R&D, and the trajectory of future R&D.     

Combinations of technology in US patents, 1926–2009: a weakening base for future innovation?

In combinatorial models of innovations, new technologies are built from combinations of pre-existing technological components. Researchers learn which components work well together by observing previously successful combinations and the pool of ideas can be ‘fished out’, i.e. exhausted, if it is not ‘restocked’ by the discovery of novel connections. We first show US patents have made increasingly less novel connections among technological constituents since the 1950s, and that the number of technological fields to which these connections are applicable has stopped growing since the 1980s. We then estimate the parameters of an ideas production function, and find parameter estimates consistent with technology fields being fished out if not continually restocked by the discovery of novel connections between technological components. We use the ideas production function to estimate the number of new patent applications induced by each patent granted between 1926 and 2001, and show this number has trended downward since the 1940s.     

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.     

The Damoclean tax and innovation

The paper presents a novel tax that is designed to improve the performance of research and development (R&D) investments. Ideally, the tax allows the technical efficiencies of monopoly while bringing about the desirable effects of the competitive pressure of R&D rivalry. Thus, with the tax, the state can sanction a monopoly of R&D investment in order to attain technical efficiencies and yet avoid the underinvestment in R&D that would result without competitive pressures. A critique of the tax emphasizes the problems of implementing it and offers a more practical alternative that would achieve the same desirable effects.     

The Long-Run Growth Effects of R&D Subsidies

This article presents a generalized versionof Howitt's (1999) model of R&D-driven growth withoutscale effects and a complete characterization of the long-rungrowth effects of R&D subsidies. R&D subsidiescan either promote or retard long-run economic growth, and surprisingly,the growth-retarding outcome occurs for a wide range of plausibleparameter values. This article also presents a new intuitiveexplanation for why R&D subsidies can have long-rungrowth effects (both positive and negative).     

R&D and productivity: Internal vs. external R&D - evidence from west german manufacturing industries

The paper explores the productivity effects of investment in external (contract) vs. internal (in-house) R&D in a sample of West-German Manufacturing Industries. The results provide strong evidence of a positive relationship between productivity and the share of external R&D in total R&D. This result is robust to alternative econometric specifications. Thus, findings suggest that the decision between internal and external R&D does matter. Moreover, results imply a nonlinear relationship between productivity and the share of external R&D for higher-technology industries, hinting at decreasing productivity effects of an increasing share of external in total R&D.     

The effectiveness of R&D subsidies

In this paper, the effectiveness of R&D subsidies is analyzed in an oligopolistic model that we apply to the cases of international R&D competition and cooperation. We find that the existence of asymmetric information among firms on whether a rival (or partner) is being subsidized or not may play a key role in explaining whether subsidies are effective or not in increasing R&D investments. In particular, it is shown that if the existence of the subsidy is made public (e.g. because strict information release regulation about R&D subsidies is enforced) and depending on the strategic relationship between the firms’ R&D efforts, an R&D subsidy could even hurt the subsidized firm.     

Cooperation and the efficiency of regional R&D activities

This paper investigates the relationship between the cooperativebehaviour of manufacturing establishments in a region and theefficiency of their R&D activities, using data for 11 Europeanregions. Some significant differences in the attitude towardsR&D cooperation as well as with regard to the efficiencyof R&D activities between the regions can be found. However,these two issues appear to a large degree to be empiricallyunrelated. Therefore, the role of R&D cooperation in regionalinnovation systems remains unclear.