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.     

R&D based knowledge capital and future firm growth: Evidence from China’s Growth Enterprise Market firms

Building upon a dynamic stochastic general equilibrium (DSGE) model, this paper examines the role of knowledge-based capital (KC) in improving firms’ future growth in productivity. Based on the analysis of Chinese listed firms from 2006 to 2017 in the Growth Enterprise Market (GEM), we find KC often generates endogenous movements in productivity and earnings over the business cycles, suggesting that the nature of KC is pro-cyclical. Moreover, investment in KC is often classified as a corporate expense and is thus deducted from the current year’s profits. Therefore, firms with high R&D investments have significantly higher future productivity growth but lower current profitability than do those with lower R&D investments. Given these characteristics, KC’s benefits to productivity and future earnings are thus not immediate. For faster growth in the long term, firms should continue investing in KC even if they may face a short-term fall in corporate earnings as a result of internal knowledge investment, especially for fast-growing GEM firms.     

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.     

Dynamic R&D choice and the impact of the firm's financial strength

ABSTRACT

This article investigates how a firm's financial strength affects its dynamic decision to invest in R&D. We estimate a dynamic model of R&D choice using data for German firms in high-tech manufacturing industries. The model incorporates a measure of the firm's financial strength, derived from its credit rating, which is shown to lead to substantial differences in estimates of the costs and expected long-run benefits from R&D investment. Financially strong firms have a higher probability of generating innovations from their R&D investment, and the innovations have a larger impact on productivity and profits. Averaging across all firms, the long-run benefit of investing in R&D equals 6.6% of firm value. It ranges from 11.6% for firms in a strong financial position to 2.3% for firms in a weaker financial position.     

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.     

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.     

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.      

Collective learning,innovation and growth in a boundedly rational,evolutionary world

We formulate a simple multiagent evolutionary scheme as a model of collective learning, i.e. a situation in which firms experiment, interact, and learn from each other. This scheme is then applied to a stylized endogenous growth economy in which firms have to determine how much to invest in R&D, where innovations are the stochastic product of their R&D activity, spillovers occur, but technological advantages are only relative and temporary and innovations actually diffuse, both at the intra and interfirm levels. The model demonstrates both the existence of a unique long-run growth attractor (in the linear case) and distinct growth phases on the road to that attractor. We also compare the long-run growth patterns for a linear and a logistic innovation function, and produce some evidence for a bifurcation in the latter case.     

To what extent do earnings affect the R&D decision of Chinese manufacturing firms?

ABSTRACT

As R&D activities are involved in inherent uncertainty of large investment, high risk and long return periods, earnings, as the main source of internal financing, have been a significant factor of R&D decision in the firms. In contrast to the previous research, this study investigates the impacts of firm’s earnings on R&D decision, in which earnings are measured by the indicators of earnings level, earnings quality and earnings persistence, while separating firm R&D activity into two stages of (i) the decision to undertake R&D activity and (ii) the amount to be invested on innovation activities. We document that earnings level can increase the probability of undertaking R&D activity, but has no effect on R&D investment intensity. Earnings quality and earnings persistence have a promotional effect on both stages of R&D decision. The empirical evidence of the subsamples shows that the impacts of earnings are heterogeneous across different ownership and technology-intensity firms.     

Employment growth and innovation at the firm level

We analyze the influence of innovation on growth rates of employment in 859 Dutch manufacturing firms over the period 1983–1988. Whereas the (growth of the) R&D intensity of firms has a slightly negative impact on employment, we find that firms with a high share of product-related R&D (as a proxi of R&D related to industrial activities in an early stage of the life cycle) experienced an above average growth of employment. The same holds for firms which directed their R&D towards information technology. Smaller firms have, ceteris paribus, substantially higher growth rates of employment than their larger counterparts. Against our expectations, R&D cooperation has no significant impact on employment growth. The same holds for activities in the fields of biotechnology and new materials.     

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.     

Spillovers and the competitive pressure for long-run innovation

This paper discusses the impact of oligopolistic product markets for innovation and growth, highlighting a novel, fundamental role of spillovers. We develop a model of endogenous growth with non-tournament R&D, where spillovers raise the relative R&D efficiency of laggards. A key feature is that the rate of innovation and the market configuration (i.e. the distribution of market shares) are jointly determined. Our results emphasize the role of spillovers in sustaining the competitive pressure that is fundamental for long-run innovation and economic growth.     

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.     

R&D Activities In a Peripheral Region: an Empirical Study with Special Reference to the North East Region of the UK

This study examines the incidence of research and development (R&D) activities, type of R&D undertaken and the incidence of R&D co-operation among manufacturing firms located in a key urban area of the North East England, a peripheral region of the UK. We have found that over 62% of manufacturing firms in this urban growth area to be R&D active, suggesting that R&D active firms tend to be concentrated in urban area s in a peripheral region, as it is the case in the leading regions. However, the incidence of R&D co-operation was found to be relatively low among R&D active firms. It is also found that the key determinants of undertaking R&D to be the existence of a core competence/product and exporting activities. These findings might be of interest to policy makers promoting economic growth via firm’s R&D activities.     

In-house R&D,external R&D and cooperation breadth in Spanish manufacturing firms: is there a synergistic effect on innovation outputs?

ABSTRACT

This study explores the nature of relationship between in-house R&D, external R&D and cooperation breadth and their joint impact on patent counts as well as technological, product and process, innovations in Spanish manufacturing firms. With regards to patent counts, empirical findings from a Generalized Method of Moments (GMM) estimator suggest a complementarity effect of internal and external R&D activities conditional on the breadth of R&D cooperation. Concerning technological innovation, results from dynamic random-effects probit models indicate no synergistic effects. In addition, we find evidence of persistence of all three innovation output measures. Our results suggest policy implications in relation to strengthening firms’ absorptive capacity that could have long-run effects.     

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.     

The struggle to survive in the R&D sector: Implications for innovation and growth

By allowing for investment activities by research and development (R&D) firms to prevent product obsolescence, we show that if legal patent protection is too strong, a higher R&D subsidy rate delivers insufficient investments for survival in the R&D sector, depressing innovation and growth in the long run.     

Does Environmental Policy Necessarily Discourage Growth?

This paper analyzes the long-run impact of an environmental policy on economic growth. A growth model with vertical innovation is modified by including intermediate goods as a source of pollution. Taxation on pollution reduces profits of intermediate firms as well as final outputs. However, it increases their mark-ups and alleviates profit losses. In this setting, profit losses are offset by the general equilibrium effect; thus, the tax enhances R&Ds which drive economic growth while it reduces pollution. If the government provides an R&D subsidy, the growth rate will be accelerated.     

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.     

R&D intensity,economic growth and firm-size growth: theory and practice

This article proposes a theoretical knowledge-driven horizontal research and development (R&D) endogenous-growth model to explain, for 10 innovative countries, the co-movement of the respective R&D intensity, economic growth and firm-size growth, by exploring short-medium-run and long-run growth effects. Bearing in mind some recent literature, we improve the R&D technology, by considering that R&D is more labour intensive through time as complexity increases, that the diffusion of designs is affected by coordination, organizational and transportation costs, and that a potential entrant will come up with the right idea is reduced because of the presence of a larger number of entrants. We show that when the economy is not initially in a steady state, it can take a saddle path towards the unique and locally saddle-path stable interior steady state. Both transitional-dynamics and steady-state behaviours of our theoretical model are then consistent with, respectively, the time-series and the cross-sectional evidence.