Technological Change, Market Rivalry, and the Evolution of the Capitalist Engine of Growth

In the early stages of Western industrialization, innovation was the domain of individuals who devoted their entrepreneurial talents to the development of a new product or process, typically setting up a new firm in order to take the innovation to the market. Today, commercial R&;D is almost exclusively carried out by corporate laboratories affiliated with manufacturing firms. The corporate R&;D lab, however, did not exist in its modern form until the late nineteenth century. The history of Western industrialization, thus, suggests that a fundamental change in the structure of incentives, and consequently in the nature and the organization of the R&;D process, occurred around the turn of the century. Three questions arise. What is the nature of this change? What economic forces caused it? What are its implications? To answer these questions, I construct a model where this change is endogenous to the evolution of the economy toward industrial maturity. The change in the locus of innovation—from R&;D undertaken by intventor-entrepreneurs, to R&;D undertaken within established firms in close proximity to the production line—results from the interaction of market structure and technological change. This interaction captures the essence of the evolution of the capitalist engine of growth and provides an economic explanation of a “stylized fact” that has received no attention in the theoretical literature. The endogenous market structure generates dynamic feedbacks that shape the growth path of the economy and determine the structural change it undergoes, including the endogenous formation of corporate R&;D labs. The evolution of market rivalry explains when and how established firms become the major locus of R&;D activity.     

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).     

Explaining Differences in Economic Growth among OECD Countries

This paper re-examines the determinants of growth of GDP per capita using panel data for OECD countries for the period 1970–1999 with data averaged over five-year periods from new perspectives. First, we introduce indicators of innovation input and technological specialization simultaneously into the empirical growth equation. Second, we employ the system-GMM (Generalized-Method-of-Moments) panel estimator that controls for (a) the possible specification bias when variables are highly persistent over time and (b) the possible simultaneity bias. We find a large and statistically significant impact of business enterprise R&D (BERD) intensity on GDP per capita with an elasticity of 0.22. The share of high-technology exports is also significantly positively related to GDP per capita, but the magnitude suggests that BERD is more important than technological specialization in explaining the level of GDP per capita. Furthermore, we find that the budget deficit and government consumption (both measured as percentages of GDP) and the volatility of growth are significantly negatively related to GDP per capita.The authors would like to thank Gunther Tichy for helpful comments on an earlier draft of this article. We also thank the participants of the Austrian economic association conference (NOEG) and the Empirical Industrial Organization workshop at the WU WIEN for helpful comments. We gratefully acknowledge financial support from the OeNB Jubiläumsfonds Project and the Austrian Federal Ministry for Economy and Labor (BMWA).JEL codes: E62, H20, H50, O23, O40     

Technological opportunity and the growth of knowledge: A Schumpeterian approach to measurement

A model of endogenous growth, based on Schumpeter's notion of trustified capitalism, is developed and applied to firm-level data for the period 1973–1991. The model relates the market value of a firm to its current profits and to its R&D expenditures. The relationship depends upon the expected rate of knowledge growth, the expected value of an innovation and the elasticity of the R&D production function. Over the sample period, investors expected knowledge to grow at an average rate of 5 percent, a measure which reflects both process innovations and new product discoveries. Elasticities of the R&D production functions are estimated for thirteen industry groups and interpreted as measures of technological opportunity. There is no evidence of secular decline in technological opportunity over the sample period, but there is some evidence of diminishing returns to R&D intensity. Variations in technological opportunity over time are not correlated across industries. In contrast, the expected rates of knowledge growth at the industry level are highly correlated with the aggregate expected rate.     

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 Skill Premium, Technological Change and Appropriability

This paper demonstrates that an increase in the relative supply of educated workers generates a structural change in the production structure towards a knowledge-intensive production process. This structural shift may ultimately lead to an increase in the return to educated labor despite the increase in their supply. The paper argues that the steady increase in the supply of educated workers that most Western economies have experienced in recent decades may be viewed as the driving force behind the observed pattern of wage inequality. In particular, the paper demonstrates that if firms can appropriate a sufficient share of the intertemporal return from knowledge generating activities of their labor force, a gradual increase in the supply of skilled workers would generate only a temporary reduction in the skill premium followed by a permanent increase in the return to skill.     

Technological Opportunity and Growth

The article presents a model of technological opportunity, modeled as a resource that is exhaustible in the short run but renewable in the long run. The exploitation and regeneration of technological opportunity is the result of an interplay between intentional incremental and radical innovations and unintentionally made discoveries. The setting for the basic model is a multidimensional metric space where existing ideas are convexly combined in order to create new ideas. When the basic set theoretical features are included in a long-run R&D model, we derive the implications for paradigm duration as well as for the growth rate of technological knowledge. We show that whereas a larger pool of R&D workers have an ambiguous effect on the short run technological growth rate, it will lead to more frequent paradigm shifts in the long run.JEL classification: O31, O41* I am particularly indebted to Joel Mokyr for an extensive discussion on an earlier draft. I have also received valuable comments from Marcus Asplund, Wlodek Bursztyn, Douglas Hibbs, Lennart Hjalmarsson, Charlie Karlsson, Susanna Lundström, Joakim Persson, Paul Segerstrom, Fabrizio Zilibotti, Lars-Erik Öller, two referees, the editor of this journal, and from seminar participants at the EEAMeeting in Lausanne, Göteborg University, IIES at Stockholm University, Stockholm School of Economics, and FIEF. Generous financial support has been granted by the Wallander-Hedelius Foundation.     

R&D Efficiency Gains Due to Cooperation

A theoretical and widely-quoted finding is that levels of cooperative R&D exceed noncooperative R&D levels when technological spillovers are relatively large, while the opposite holds for relatively small technological spillovers. We qualify this result by showing that for relatively small technological spillovers the comparison is not driven by the extent of technological spillover, but by the increase in technological spillover due to cooperation in R&D. In particular, an agreement to cooperate in R&D always raises R&D efforts if the post-cooperative technological spillover rate is high enough.     

Scale effects in Schumpeterian models of economic growth

Early models of Schumpeterian growth incorporate scale effects predicting that large economies grow faster than small economies, and that population growth causes accelerating per capita income growth. An absence of clear empirical evidence for these scale effects has led some researchers to question the foundations underlying the Schumpeterian approach to growth. This paper reviews empirical evidence on the relationship between scale and growth, and recent attempts to construct Schumpeterian growth models without scale effects.     

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.     

A comparative analysis of the change in R&D efficiency: a case of R&D leaders in the technology industry

This paper measures the cumulative change in research and development (R&D) efficiency of globally leading R&D companies in the technology industry. We use Data Envelopment Analysis /Malmquist index to analyse 49 such companies. The change in R&D efficiency is analysed by decomposing the Malmquist index into ‘catch-up’ and ‘frontier shift’ indices, and by comparing cumulative indices to those at the starting period. Those cumulative indices are obtained at both a firm and an industry level. Results indicate that the overall R&D efficiency of these globally leading R&D companies declined slightly during the period 2007–2013. At a firm level, this study determines in detail how the trend of each firm in R&D activities differs from other companies.     

What are good R&D investment strategies for leaders and followers?

Research and development (R&D) investment affects the growth of firms in the same industry differently according to their technological positions. This study empirically investigates differences in how R&D investment influences firm growth between technological leaders and followers. Additionally, this study investigates the moderating effects of complementary assets and market competition on the relationship between R&D investment and firm growth. Using a sample of 2322 observations from 492 firms in the U.S. chemical and allied products industry for the period 2000–2009, we show that an increase in R&D investment leads to greater firm growth for technological followers than for technological leaders. We also find that the moderating effects of complementary assets and market competition vary depending on whether a firm is a technological leader or follower.     

The Microeconomics of an R&D-Based Model of Endogenous Growth

This paper explores the microeconomic structure underlying a class of endogenous growth models in which product differentiation and stochastic quality growth coexist. The general equilibrium model generates a stationary stochastic equilibrium in which a nondegenerate ergodic distribution of firm size depends systematically on parameters of the model. Features of the model necessary for stable endogenous aggregate growth are explored, and predictions of the model are compared with microeconometric evidence on R&D intensity, firm growth, and concentration.     

Industry and the Family: Two Engines of Growth

We generalize the class of endogenous growth models in which the scale of the economy has level rather than growth effects, and study the implications of different demographic and technological factors when both fertility choice and research effort are endogenous. The model incorporates two dimensions of technological progress: vertical (quality of goods) and horizontal (variety of goods). Both dimensions contribute to productivity growth but are driven by different processes and hence respond differently to changes in fundamentals. Specifically, while unbounded vertical progress is feasible, the scale of the economy limits the variety of goods. Incorporating a linearity in reproduction generates steady-state population growth and variety expansion. We thus have two engines of growth generating dynamics that we compare with observed changes in demographics, market structure, and patterns of growth. Numerical solutions yield the important insight that, while endogenous, fertility responds very little to industrial policies. Demographic shocks, in contrast, have substantial effects on growth.     

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.     

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.