Abstract
This chapter aims to contribute to the better understanding of R&D by scholars and practitioners. It includes a first section where the concept of innovation is defined and its public good nature and cumulative dimension are analysed. Next, the incentives that firms have to undertake R&D to attain a competitive edge upon rivals are considered. This entails the consideration of both ex ante and ex post incentives to undertake R&D. Since innovation is costly and derives important external effects, cooperation in R&D activities is prominent in several industries where firms enter into research joint ventures, or form research networks. The effect of cooperation is that, under some circumstances, the industry performance is better as compared to full competition. The final section addresses the complementarities and conflicts among the different microeconomic policies (trade, industrial and competition policy) faced by governments when considering the support of R&D activities.
TopIntroduction
[…] Where is the wisdom we have lost in knowledge? Where is the knowledge we have lost in information?-T.S. Elliot
In the world today, information is increasingly available to all people. The latest developments in computing, information, and telecommunication technologies have sped up the production and dissemination of information. But information has to be converted into knowledge before being used to produce innovation. Since innovation is one of the drivers of growth and development, we will want to refer in this chapter to how economic actors use information to gain in efficiency and achieve a better performance that potentially leads to more prosperous economies. Aware of this fact, governments include Research & Development (R&D) related issues as targets. For example, research, development, and innovation are key policy components of the European Union (EU) strategy for economic growth, as presented in “Europe 2020”. The EU acknowledges that by fostering market take-up innovative goods and services, smart growth and job creation, which will be important in addressing societal challenges. Increased labour productivity, industrial competitiveness and the development of green and efficient resources are, thus, the final goals.
As shall be made clear below, most MENA countries are lagged with respect to the developed economies in terms of innovation capabilities. Our contribution is to give a broad overview useful both for academicians and practitioners in those countries regarding: the specific nature of innovation, how firms use innovation to acquire a sustainable advantage in the market by either competing or collaborating and, finally, how governments elsewhere have developed instruments and implemented policies that enhance innovation and ultimately economic growth. In doing so, we survey the mainstream economic literature that addresses these questions.
Just to provide a glimpse of the relevance of innovation in modern economies, some data are provided on three important features that characterize innovation. First, regarding the participation of innovation in Gross Domestic Product (GDP), note that the Gross Expenditure on R&D (GERD) as a percentage of GDP is in 2012 above 2.00 in all the mainstream economies, and this ratio is mainly increasing in the period 2002-12 (see Table 1a below for data of a sample of countries in the period 2002-12). A further relevant aspect of innovation is the public support governments provide in funding R&D activity. Table 2 shows the percentage of GERD financed by governments in a sample of countries. Note that about one third of the expenditure is financed by the governments in developed economies. This ratio is higher in most of the developing economies.
Key Terms in this Chapter
Efficiency Effect: If a monopolist would lose his privileged position in case the entrant, and not him, gets the non-drastic innovation, the monopolist is willing to pay more for the innovation, and incur greater R&D expenditure, to remain as a monopolist.
Information (One Bit Of): one bit of information is the amount of information needed to make a decision between two equally likely alternatives.
Replacement Effect: It indicates the lower incentive to innovate that a monopolist has, as compared to an entrant, when the innovation is drastic.
Absorptive capacity: The ability a firm has to incorporate knowledge to its routines and production processes.
Research Joint Venture (RJV): An association of firms or individuals formed to undertake a specific business research project.
Embodied Knowledge: Knowledge that is incorporated in goods and services.
Trade Policy: It encompasses tariffs (or subsidies) as well as non-tariff barriers (quotas, antidumping duties) used by governments that are related to trade among countries.
Licensing: The granting of the use of patented intellectual property to a third party (the licensee) by its owner (the licensor) in exchange of a payment.
Knowledge Spillovers: A particular kind of a positive externality such that the knowledge produced by one agent benefits other agents without receiving the former any kind of compensation or payment in return.
Innovation: Process of using, applying and transforming scientific and technical knowledge that makes available an application with commercial use.
Industrial Policy: The set of government interventions that, by way of taxes (or subsidies) and regulations on domestic outputs or inputs, have the goal of altering the resource allocation resulting from the free operation of the market.
Tacit Knowledge: What is in the mind of those who create it, uncodified and unpublished, differs across persons and it can only be partially transmitted by collaborations with colleagues or shared experiences.
Research And Development (R&D): Intellectual creation whose aim is to increase the stock of knowledge, and the use of this knowledge to create new applications. It includes three activities: basic research, applied research and experimental development.
Knowlegde: The complex use of information, data and experience which aims at finding the why and how of things.
Competition Policy: The set of policies that preserve fair competition in a way that welfare is not reduced; that is, the fighting of monopolization, collusion and other restrictive practices.
Patent: The exclusive property right a government grants to the inventor, for a limited period of time, in exchange for the detailed disclosure of the invention content.