fundaB8 Flashcards
(30 cards)
What role do incentives play in a company’s innovation performance?
Incentives motivate companies to invest in R&D, which can include profit motives (seeking revenue from new products), market competition (to stay ahead of competitors), patent protection (securing exclusive rights to new inventions), and government subsidies or tax incentives (financial support to encourage innovation). These incentives drive innovation efforts and performance within a company.
Why do some companies have higher innovation productivity than others, even with similar R&D incentives?
Companies differ in innovation productivity due to differences in capabilities (e.g., advanced technologies, skilled labor, infrastructure) and resources (financial and material support). In addition, company culture, leadership, and the ability to collaborate with external partners such as universities or other companies also play a significant role in enhancing innovation productivity.
What factors influence a company’s innovation strategy, and how do they impact its approach to innovation?
A company’s innovation strategy is shaped by several factors: risk tolerance (whether the company prefers incremental, lower-risk innovation or seeks disruptive, high-risk innovations), market positioning (whether the company focuses on niche or broad markets), and focus areas (such as prioritizing product innovation or improving processes). These factors determine whether a company focuses on making incremental improvements or pursuing groundbreaking, market-changing innovations.
What is good concentration in the context of company growth?
Good concentration occurs when technological improvements or increased competition lead to a few dominant firms, but competition remains strong, and innovation continues. It results in more productive companies with greater market share but no reduction in market competition.
What defines bad concentration in company growth?
Bad concentration happens when companies create barriers to competition, reducing market entry and innovation. This leads to increased profits for incumbents but less innovation and fewer choices for consumers.
What do incentives mean in the context of innovation, and how do they drive investment?
Incentives for innovation come from the potential profits a company can gain from innovating. The difference between profits before and after innovation (pre- and post-innovation rents) motivates companies to invest in innovation. The company with the highest potential profit difference has the strongest incentive to innovate, often outcompeting rivals by investing more to accelerate the process from idea to patented invention.
What is the difference between process and product innovation?
Process innovation involves creating a new production process while keeping the product the same, whereas product innovation involves introducing a new product without changing the production process.
What distinguishes drastic and nondrastic process innovation?
Drastic innovation allows the innovator to act as a monopolist without facing price competition, while nondrastic innovation offers a cost advantage but is still constrained by competition.
How can excessive competition affect innovation? (Schumpeterian Effect)
Excessive competition may lead firms to focus on short-term goals rather than investing in long-term, riskier R&D projects. It reduces the motivation to innovate, as companies may not see enough profit potential to justify the investment.
Why are less competitive markets more favorable for innovation?
In less competitive markets, the potential rewards for successfully innovating are greater, providing stronger motivation for companies to invest in R&D. A temporary profit advantage is needed to offset the costs and risks associated with innovation.
Why do monopolies and large companies have stronger incentives to innovate?
Monopolies and large companies find it easier to finance innovation because of their existing profits and lower costs in capital markets, making it less risky for them to invest in R&D. They also face less difficulty in obtaining funding due to their established market presence. Their ability to invest heavily in innovation is enhanced by economies of scale, which allow them to spread R&D costs over a larger volume, generating higher returns from innovation activities
How do economies of scale and scope benefit innovation in large companies?
Large companies benefit from economies of scale by gaining higher returns from R&D due to spreading the costs over a larger product range. Economies of scope occur when innovation in one area leads to benefits in other areas, and large, multi-product firms can better internalize these spillovers. Furthermore, working on multiple projects reduces overall risk, as the failure of one project can be offset by the success of others, making innovation efforts less risky.
What is the Escape Competition Effect, and how does it encourage innovation?
The Escape Competition Effect, formalized by Kenneth Arrow in 1962, suggests that competition motivates firms to innovate and differentiate themselves to gain future market power. By innovating, firms aim to reduce future competition, achieve higher profits, and secure a less competitive position, thus driving them to invest in R&D and new strategies.
What are the main assumptions behind the Schumpeterian Effect (SE)?
the Schumpeterian Effect (SE) assumes that a firm’s size is fixed, meaning innovation does not alter the firm’s size. The theory suggests that competition drives innovation, encouraging firms to innovate in order to stay ahead of rivals and increase profits. Firms must innovate to maintain or gain competitive advantage.
What assumptions underlie the Escape Competition Effect (ECE), and how do large firms benefit from innovation?
The Escape Competition Effect (ECE) assumes that the innovating firm can expand its market share at zero cost and does not require additional capabilities (such as brand name or distribution). Large firms have greater incentives to innovate due to their ability to absorb large sunk investments, control complementary assets (like production and distribution), and retain the full benefits of innovation, especially when innovation cannot be easily sold or acquired.
What is the central question regarding competition and innovation that economists have long explored?
Economists have long been interested in the relationship between competition and innovation, but economic theory seems to be contradicted by the evidence. Theories predict that innovation should decline with competition, but empirical work finds that it increases
What is the inverted-U relationship between competition and innovation?
The relationship between competition and innovation is not linear but instead follows an inverted-U shape, where innovation increases with competition up to a point and then decreases. This means that initially, more competition encourages innovation, but beyond a certain level, it hinders it
How does the “joint profit effect” influence innovation?
The “joint profit effect” explains how new firms entering a market can increase the incentives for incumbent firms to innovate in order to maintain their market position. The fear of losing a monopoly position motivates incumbents to innovate
How is innovation typically measured in empirical research?
Innovation is measured using metrics such as R&D expenditure, patent counts (often weighted by citations), and total factor productivity (TFP)
What is the Lerner Index and how is it used to measure competition?
The Lerner Index measures the price-cost margin, which is the difference between price and marginal cost. A value of 1 indicates perfect competition. The lower the index, the less competitive the market. It is calculated as operating profits net of depreciation and financial cost of capital, divided by sales.
Other measures include the number of firms in a market, concentration ratios, and the Herfindahl-Hirschman Index (HHI)
What is the challenge of endogeneity in studying competition and innovation?
Endogeneity means that competition and innovation are mutually affected, making it difficult to determine the true causal relationship between them. For example, higher innovation can reduce competition, and higher competition can increase innovation
How do researchers address endogeneity in the competition-innovation relationship?
Researchers use policy instruments (like the Thatcher privatizations and the EU Single Market Program) and control variables to account for external factors that might influence both competition and innovation. Another method is to find exogenous changes in competition, like the dissolution of cartels
What is a “neck-and-neck” industry, as discussed in the Aghion et al. (2005) model?
A “neck-and-neck” industry is one where the firms are operating at similar technological levels. In these sectors, competition significantly reduces pre-innovation rents, thus incentivizing innovation
What are “laggard” firms in the Aghion et al. (2005) model?
“Laggard” firms are those with lower initial profits and that are behind the technological frontier. In sectors dominated by laggard firms, increased competition may primarily affect post-innovation rents
