Invention Innovation Diffusion RD Expenditures Role of Entrepreneurs

Invention. Innovation. Diffusion R&D Expenditures Role of Entrepreneurs Firm’s Optimal R&D Amount Increased Profits Imitation and R&D Incentives Growth of Business R&D Role of Market Structure Inverted-U Theory Technological Advance and Efficiency Last Word Key Terms End Show 24 -1 24 Technology, R&D, and Efficiency Copyright 2008 The Mc. Graw-Hill Companies

Chapter Objectives Invention. Innovation. Diffusion R&D Expenditures Role of Entrepreneurs Firm’s Optimal R&D Amount Increased Profits Imitation and R&D Incentives Growth of Business R&D Role of Market Structure Inverted-U Theory Technological Advance and Efficiency Last Word Key Terms End Show 24 -2 • Differences Between an Invention, an Innovation, and Technical Diffusion • How Entrepreneurs and Other Innovators Further Technological Advance • How a Firm Determines its Optimal Amount of Research and Development (R&D) • Why Firms Can Benefit From Their Innovation Even Though Rivals Have an Incentive to Imitate It • About the Role of Market Structure in Promoting Technological Advance • How Technical Advance Enhances Productive and Allocative Efficiency Copyright 2008 The Mc. Graw-Hill Companies

Invention-Innovation-Diffusion Invention. Innovation. Diffusion R&D Expenditures Role of Entrepreneurs Firm’s Optimal R&D Amount Increased Profits Imitation and R&D Incentives Growth of Business R&D Role of Market Structure Inverted-U Theory Technological Advance and Efficiency Last Word Key Terms End Show 24 -3 • Technological Advance • Very Long Run • Invention – Patent • Innovation – Product Innovation – Process Innovation • Diffusion • R&D Expenditures Copyright 2008 The Mc. Graw-Hill Companies

R&D Expenditures Invention. Innovation. Diffusion R&D Expenditures Role of Entrepreneurs Firm’s Optimal R&D Amount Increased Profits Imitation and R&D Incentives Growth of Business R&D Role of Market Structure Inverted-U Theory Technological Advance and Efficiency Last Word U. S. R&D Expenditures, 2004 Applied Research (Invention) Basic Research 19% 4% Development (Innovation and Imitation) 77% Key Terms End Show Source: National Science Foundation 24 -4 Copyright 2008 The Mc. Graw-Hill Companies

R&D Expenditures Invention. Innovation. Diffusion R&D Expenditures Role of Entrepreneurs Firm’s Optimal R&D Amount Increased Profits Imitation and R&D Incentives Growth of Business R&D Role of Market Structure Inverted-U Theory Technological Advance and Efficiency Last Word Key Terms End Show GLOBAL PERSPECTIVE Total R&D Expenditures as a Percentage of GDP, Latest Data 0 Sweden Japan United States Germany France Canada United Kingdom Italy 1 2 3 4 5 4. 27 3. 12 2. 67 2. 50 2. 26 1. 87 1. 11 Source: National Science Foundation 24 -5 Copyright 2008 The Mc. Graw-Hill Companies

Role of Entrepreneurs Invention. Innovation. Diffusion R&D Expenditures Role of Entrepreneurs Firm’s Optimal R&D Amount Increased Profits Imitation and R&D Incentives Growth of Business R&D Role of Market Structure Inverted-U Theory Technological Advance and Efficiency Last Word Key Terms End Show 24 -6 • • Entrepreneurs Other Innovators Forming Start-Ups Innovating Within Existing Firms • Anticipating the Future • Exploiting University and Government Scientific Research Copyright 2008 The Mc. Graw-Hill Companies

Invention. Innovation. Diffusion R&D Expenditures Role of Entrepreneurs Firm’s Optimal R&D Amount Increased Profits Imitation and R&D Incentives Growth of Business R&D Role of Market Structure Inverted-U Theory Technological Advance and Efficiency Last Word Key Terms End Show 24 -7 Firm’s Optimal R&D Amount • Interest-Rate Cost of Funds – Bank Loans – Bonds – Retained Earnings – Venture Capital – Personal Savings • Interest-Rate Cost of Funds Curve • Expected-Rate-of-Return Curve Copyright 2008 The Mc. Graw-Hill Companies

Firm’s Optimal R&D Amount Key Terms Interest Expected Rate R&D Rate of Cost of Return, % Millions Funds, % 18 $10 8 16 20 8 14 30 8 12 40 8 10 50 8 8 60 8 6 70 8 4 80 8 End Show 24 -8 Copyright 2008 The Mc. Graw-Hill Companies 20 16 Expected Rate of Return, r And Interest Rate, i (Percent) Invention. Innovation. Diffusion R&D Expenditures Role of Entrepreneurs Firm’s Optimal R&D Amount Increased Profits Imitation and R&D Incentives Growth of Business R&D Role of Market Structure Inverted-U Theory Technological Advance and Efficiency Last Word 12 r=i 8 4 0 i r 20 40 60 80 Research and Development Expenditures (Millions of Dollars) 100

Invention. Innovation. Diffusion R&D Expenditures Role of Entrepreneurs Firm’s Optimal R&D Amount Increased Profits Imitation and R&D Incentives Growth of Business R&D Role of Market Structure Inverted-U Theory Technological Advance and Efficiency Last Word Firm’s Optimal R&D Amount • Optimal Versus Affordable R&D • Expected, Not Guaranteed, Returns • Adjustments W 24. 1 Key Terms End Show 24 -9 Copyright 2008 The Mc. Graw-Hill Companies

Increased Profits Invention. Innovation. Diffusion R&D Expenditures Role of Entrepreneurs Firm’s Optimal R&D Amount Increased Profits Imitation and R&D Incentives Growth of Business R&D Role of Market Structure Inverted-U Theory Technological Advance and Efficiency Last Word Key Terms • Via Product Innovation –Importance of Price –Unsuccessful New Products –Product Improvements • Reduced Cost Via Process Innovation End Show W 24. 2 24 -10 Copyright 2008 The Mc. Graw-Hill Companies

Increased Profits Process Innovation Increases Total Product and Decreases ATC 2500 TP 1 2000 0 1000 Units of Labor Average Total Cost TP 2 Total Product Invention. Innovation. Diffusion R&D Expenditures Role of Entrepreneurs Firm’s Optimal R&D Amount Increased Profits Imitation and R&D Incentives Growth of Business R&D Role of Market Structure Inverted-U Theory Technological Advance and Efficiency Last Word ATC 1 ATC 2 $5 4 0 2000 2500 Units of Output Making Greater Production Possible At Lower Costs Key Terms End Show 24 -11 Copyright 2008 The Mc. Graw-Hill Companies

Invention. Innovation. Diffusion R&D Expenditures Role of Entrepreneurs Firm’s Optimal R&D Amount Increased Profits Imitation and R&D Incentives Growth of Business R&D Role of Market Structure Inverted-U Theory Technological Advance and Efficiency Last Word Key Terms End Show 24 -12 Imitation and R&D Incentives • Imitation Problem • Fast-Second Strategy • Benefits of Being First – Patents – Copyrights and Trademarks – Brand-Name Recognition – Trade Secrets and Learning by Doing – Time Lags – Profitable Buyouts Copyright 2008 The Mc. Graw-Hill Companies

Imitation and R&D Incentives Invention. Innovation. Diffusion R&D Expenditures Role of Entrepreneurs Firm’s Optimal R&D Amount Increased Profits Imitation and R&D Incentives Growth of Business R&D Role of Market Structure Inverted-U Theory Technological Advance and Efficiency Last Word Distribution of U. S. Patents, by Foreign Nation GLOBAL PERSPECTIVE Top 10 Foreign Countries Japan (574, 865) Germany (221, 120) France (84, 902) U. K. (83, 991) Canada (63, 994) Taiwan (57, 605) Italy (36, 883) Switzerland (36, 802) South Korea (35, 673) Key Terms Sweden (29, 696) End Show Source: U. S. Patent and Trademark Office 24 -13 Copyright 2008 The Mc. Graw-Hill Companies

Growth of Business R&D U. S. Business R&D Expenditures, 1980 - 2005 Business R&D Expenditures (Billions of 2000 Dollars) Invention. Innovation. Diffusion R&D Expenditures Role of Entrepreneurs Firm’s Optimal R&D Amount Increased Profits Imitation and R&D Incentives Growth of Business R&D Role of Market Structure Inverted-U Theory Technological Advance and Efficiency Last Word Business R&D Expenditures Key Terms Year End Show 2005 Source: National Science Foundation 24 -14 Copyright 2008 The Mc. Graw-Hill Companies

Role of Market Structure Invention. Innovation. Diffusion R&D Expenditures Role of Entrepreneurs Firm’s Optimal R&D Amount Increased Profits Imitation and R&D Incentives Growth of Business R&D Role of Market Structure Inverted-U Theory Technological Advance and Efficiency Last Word Key Terms End Show 24 -15 • Market Structure and Technological Advance –Pure Competition –Monopolistic Competition –Oligopoly –Pure Monopoly Copyright 2008 The Mc. Graw-Hill Companies

Inverted-U Theory R&D Spending Varies With Concentration Ratio More Competition Less Competition R&D Expenditures as a Percentage of Sales Invention. Innovation. Diffusion R&D Expenditures Role of Entrepreneurs Firm’s Optimal R&D Amount Increased Profits Imitation and R&D Incentives Growth of Business R&D Role of Market Structure Inverted-U Theory Technological Advance and Efficiency Last Word 0 25 50 75 Concentration Ratio (Percent) 100 A “Loose” Oligopoly Supports the Optimum R&D Spending Key Terms End Show 24 -16 Copyright 2008 The Mc. Graw-Hill Companies

Technological Advance and Efficiency Invention. Innovation. Diffusion R&D Expenditures Role of Entrepreneurs Firm’s Optimal R&D Amount Increased Profits Imitation and R&D Incentives Growth of Business R&D Role of Market Structure Inverted-U Theory Technological Advance and Efficiency Last Word • Productive Efficiency –Increasing Productivity of Inputs • Allocative Efficiency –A More-Preferred Mix of Goods and Services • Creative Destruction Key Terms End Show 24 -17 O 24. 1 Copyright 2008 The Mc. Graw-Hill Companies

Invention. Innovation. Diffusion R&D Expenditures Role of Entrepreneurs Firm’s Optimal R&D Amount Increased Profits Imitation and R&D Incentives Growth of Business R&D Role of Market Structure Inverted-U Theory Technological Advance and Efficiency Last Word Key Terms End Show 24 -18 On the Path to the Personal Computer and the Internet t Las d r o W • Technological Advance Clearly Evident in the Development of the Personal Computer and the Internet • Can You Cite Evidence of Creative Destruction at Work Through the Time Period? Copyright 2008 The Mc. Graw-Hill Companies

Key Terms Invention. Innovation. Diffusion R&D Expenditures Role of Entrepreneurs Firm’s Optimal R&D Amount Increased Profits Imitation and R&D Incentives Growth of Business R&D Role of Market Structure Inverted-U Theory Technological Advance and Efficiency Last Word Key Terms • technological advance • interest-rate cost-offunds curve • very long run • expected-rate-ofreturn curve • invention • patent • innovation • product innovation • process innovation • diffusion • imitation problem • fast-second strategy • start-ups • inverted-U theory of R&D • venture capital • creative destruction End Show 24 -19 • optimal amount of R&D Copyright 2008 The Mc. Graw-Hill Companies

Next Chapter Preview… Invention. Innovation. Diffusion R&D Expenditures Role of Entrepreneurs Firm’s Optimal R&D Amount Increased Profits Imitation and R&D Incentives Growth of Business R&D Role of Market Structure Inverted-U Theory Technological Advance and Efficiency Last Word The Demand for Resources Key Terms End Show 24 -20 Copyright 2008 The Mc. Graw-Hill Companies