MAINTENANCE AND DESTRUCTION OF R&D LEADERSHIP*

Abstract

In the standard Schumpeterian-growth models only follower firms invest in R&D activities and larger economies grow faster. Since these results are counterfactual, this paper reveals that leader firms often support R&D activities and economic growth can be independent of the market size. In particular, the maintenance of R&D leadership increases with: (i) the technological-knowledge gap between leader and followers, since a firm-specific learning effect of accumulated technological knowledge from past R&D is considered, (ii) the leaders' strategies that delay the next successful R&D supported by some follower firm, (iii) the market size, and (iv) the up-grade of each innovation. IntroductionMost Schumpeterian-growth models (e.g. Grossman and Helpman, 1991) assumed that the leadership of the firms that produce state-of-the-art qualities is only temporary, as they are permanently subject to destruction by new qualities. That is, since all firms, the leader and followers, have access to the same R&D technology in each good, once a firm achieves success and becomes a monopoly, it does not support new R&D activity. In fact, in this context, the incentives of leaders to invest in R&D are lower due to the 'Arrow (1962) effect', i.e. the expected gain of the leader is just the difference between expected profits with the next successful R&D and the existing one, while the expected gain for each follower is given by all the expected profits with the next successful R&D.However, the empirical evidence shows that this pattern of leapfrogging is unrealistic (e.g. Scherer, 1984, ch. 11;Blundell et al., 1999;Etro, 2004;Aghion and Griffith, 2005). In an issue of The Economist (2004), the authors of the 'Economics Focus' column stated that leaders may have a far more vital role in producing innovations than previously thought; they further expressed doubts about the prevailing economic theory according to which * Manuscript received 2.6.10; final version received 15.11.10.

R&D Direction and North‐South Diffusion, Human Capital, Growth, and Wages

“…Thus, some works came to assume that leaders have an R&D cost advantage and/or that there are diminishing returns in the R&D effort at the firm level, implying that they devote resources to R&D too-for example, Segerstrom and Zolnierek [37], Segerstrom [38], and Afonso and Bandeira [39]. Others, such as Dinopoulos and Syropoulos [40,41] and Sener [42], present models where leaders apply resources in rent-protecting activities, which increase the expected duration of their monopoly power.…”

Costly investment and complementarities in an international trade model with directed technological change

“…It is ‘replacement or Arrow effect’ (e.g., Aghion & Howitt, , Chapter 2). However, some studies focusing on the interaction between entrants and incumbents (and thus outside the heart of our analysis) find that incumbents can apply resources to R&D: (a) because leaders have R&D cost advantage over followers and/or there are diminishing returns in R&D effort at the firm level (e.g., Segerstrom, ); (b) due to the technological‐knowledge gap between incumbents and entrants, the incumbents' strategies to delay the next successful R&D are supported by some follower, the market size, and the upgrade of each innovation (e.g., Afonso & Bandeira, ).…”