Chapter 11 - Technology, R&D, and efficiency. In this chapter, students will be able to understand: Invention, innovation, and technological diffusion; furthering technological advance; optimal amount of R&D; benefits from innovation; market structure and technological advance; technological advance and efficiency. | Technology, R&D, and Efficiency Chapter 11W McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter Objectives Invention, innovation, and technological diffusion Furthering technological advance Optimal amount of R&D Benefits from innovation Market structure and technological advance Technological advance and efficiency 11W- Technological Advance Occurs in the very long run Occurs in response to incentives Arises from firm rivalry Firms seek new profit opportunities 11W- Invention-Innovation-Diffusion Three step process Invention Patent Innovation Product innovation Process innovation Diffusion Requires R&D expenditure 11W- . R&D Expenditures Source: National Science Foundation Basic Research Applied Research (invention) 4% 22% 74% Development (innovation and imitation) Composition of business outlays 2006 11W- Source: National Science Foundation 0 1 2 3 4 5 R&D Expenditures Total R&D expenditures as a percentage of GDP, 2006 Sweden Japan United States Germany France Canada United Kingdom Italy Russia 11W- Role of Entrepreneurs Entrepreneurs Bear financial risk Other innovators Forming start-ups Innovating within existing firms Anticipating the future Exploiting university and government scientific research 11W- Firm’s Optimal R&D Amount Marginal benefit and marginal cost Sources of funds Bank loans Bonds Retained earnings Venture capital Personal savings Interest-rate cost of funds Expected-rate-of-return 11W- 18 16 14 12 10 8 6 4 $10 20 30 40 50 60 70 80 8 8 8 8 8 8 8 8 20 16 12 8 4 0 20 40 60 80 100 Expected rate of return, % R&D millions Interest Rate cost of funds, % Expected Rate of Return, r And Interest Rate, i (Percent) Research and Development Expenditures (Millions of Dollars) r = i i r Firm’s Optimal R&D Amount 11W- Three important points Optimal vs. affordable R&D Expected, not guaranteed, returns Adjustments Firm’s Optimal R&D Amount 11W- Increased Profits Increased . | Technology, R&D, and Efficiency Chapter 11W McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter Objectives Invention, innovation, and technological diffusion Furthering technological advance Optimal amount of R&D Benefits from innovation Market structure and technological advance Technological advance and efficiency 11W- Technological Advance Occurs in the very long run Occurs in response to incentives Arises from firm rivalry Firms seek new profit opportunities 11W- Invention-Innovation-Diffusion Three step process Invention Patent Innovation Product innovation Process innovation Diffusion Requires R&D expenditure 11W- . R&D Expenditures Source: National Science Foundation Basic Research Applied Research (invention) 4% 22% 74% Development (innovation and imitation) Composition of business outlays 2006 11W- Source: National Science Foundation 0 1 2 3 4 5 R&D Expenditures Total R&D expenditures as a percentage of GDP, .
