Lecture 3 - spillover, approprabilty and uncertaintuy Flashcards
(20 cards)
Define input and output spillovers + arrows findings
-RnD input spillovers refer to how a firms RND efforts/inputs directly lead to helping rival firms to inovate.
-Rnd output spillovers refer to when rivals are able to make a profitable use of an innovation without payment.
knowledge/benefits of Rnd leak to other firms. Knowledge is hardly ever fully protected. Positve exetenality, reciver always benefits and may be social benfits.
-Arrow revealed using information typically reveals it to others, movement of labour from firms spreasds info and legal protections like patents only a provide a partial barrier to spillovers.
RND input spillover example
-The pharmaceutiacal industry is charactersied made up of high rates of open scientific literature publisihing.: Knowledge spillovers happens through publications, conferences, and employee mobility.
-Scientists rely heavily on public publicasions and researchers consistenyl monitor public/rival firm activieis.
-Scientists typicallynkow the exact nature of rivals rnd efforts which in turn shapes their own.
Eg) A firm’s drug development project is redirected or directly improved after learning about a competitor’s breakthrough via conferences, journals, or networking.
RND output spillover exampel + evidence
-When a firm creates a new product, the entire value cannot be captured unless it price discrimintates customers, which is not possible ususally.
-Therefore the private return on RnD is less than the social benefit, leaving theoretical space for other firms to benefit from the innovation, output spillover.
Mansfield et al. (1981): Found that 60% of successful U.S. patented innovations were imitated within 4 years.
Reasons for output spillovers + Mansfield 1985
-Mansfield 1985 described:
-input suppliers and customers pass on a great deal of relevant information
Patent applications are publicly examined very carefully.
-Reverse engerneering is carreied out to copy products.
-Many firms don’t try very hard to keep their new ideas secret because they think it’s almost impossible to stop others from finding out
How to distinugish between input and output spillovers
Input spillovers happen during the research process when knowledge and ideas are shared or leaked.
Output spillovers happen after the innovation is created, when others copy or imitate the final product or process.
Explain the difference betwee basic, applied and development research
-According to US national science foundation 2001:
-Basic resarch is research which seeks to icnrease knowledge and understanding of fundemental facts without a specific commercial use.
-Applied research refers to research which seeks knowledge to solve a specific, recognised problems or meet a commercial goal
-Development research reders to the using of knowledge to create useful products/processses including designing prototypes.
Describe applivations of basic and applied research differ
Basic Research
mainly conducted in universities Has strong public good characteristics and wide spillovers.
Involves Excessive appropriability (e.g. patents) can hurt overall technical progress/ stop others using product.
Applied Research
Mostly conducted in the private sector where outcomes are directly used
Firms rely on theirability to understand and utilize new knowledge
Are spillovers bad/consequnces
-Reduce incentives to innovate, rivals can benefit whilst free riding.
-Not bad from a socail POV with input spillovers increases likelihood of innovations occuring and Rnd productivity
and output spillovers improving market performance and consumer beenfits.
-Broad consequences:
-Underinvestment in rnd, affect pattent policy
-Justfiy gov support for bassic research, to encourage knowledge creation which firms alone wouldnt of invested in.
-influencing patent policy.
Effects of spillovers on Appropriability
-Spillovers reduce innvoators ability to ‘capture’ beenftis from Rnd
-Example The 1956 US antitrust decree required AT&T to license patents openly, which helped develop UNIX and boosted the US semiconductor chip industry.
-The level of appropriabilty depends on legal protections, secrecy of innovations and market conditions which allow innovators to profit.
Spillover Effects on Knowledge Absorption + tacti knowledge
-Cohen & Levinthal, 1989 describe hwo firms need absorbtive capacity, which is the anbilty to recognise and use exernal knowledge effectively, particularly spillovers.
absorbtion refers to using basic research findings as a foundation for applied R&D.
Tacit knowledge is informal and hard to transfer informatino (e.g., secret recipes.
Firms must maintain internal expertise to absorb and benefit from such tacit knowledge generated elsewhere.
Spillover Effects on R&D Investment
Angelmar finds firms spend more on RnD when approrabilrty is higher, hjigher spillover less incentive to rnd invest
Spillover Effects on Social Welfare and Policy aim
Spillovers accelerate innovation diffusion (spreading of ideas), improving overall productivity and social welfare.
But they cause underinvestment in R&D since innovators can’t fully exclude free riders.
This justifies policy funding of basic research universities), .
Polict such as Patent and IP laws must aim to balance protecting innovators’ returns with promoting knowledge sharing/social welfare.
R&D Uncertainty + two types
-RnD outcomes are uncertain ex ante (before starting), firms and even rational designers can consistently predict whether innovation success or fails
-So many variables involved, some innnvations take years to become successful, eg) post it not took 12 years.
-Comepetive uncertaintyt refers to risk that rival firms innovate first.
-Ex ante uncertainty — refers to the riskn the may fail or lack market fit .
-Uncertainty combined with spillover effects and other downsides of innovation reduce incentive to innovate
Describe assumption of d’Aspremont & Jacquemin (1988) model + refer to paper flashcards + 3 cases
The d’Aspremont & Jacquemin (1988) model shows how R&D spillovers affects differ depending on whether firms cooperate or not.
-Two stage game, 2 firms first run rnd then set Q cournot in final market.
-Stage 1 costs are quadratic (rnd costs) C(xi) = yxi^2 / 2
-Each firms cost of production taking into account qi own production, own research/effort and rival research.
ci(qi,xi,xj) = (A - xi - Bxj)shows that a production costs fall with its own R&D/effort and also partly (spillover factor) from its rival’s R&D due to spillovers.
R&D has positive spillover effects, lowers production costs
-Different outcomes: Non cooperateive Rnd + non cooeprative final market
-Cooperative RnD + non-cooperative final market
-Cooperative Rnd + cooperative final market
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Profit function is difference between revenue from selling output (2nd stage) and the costs of production and R&D investment/quadratic cost.
Define a research joint venture + aim
-A RJV refers to an agreement by two or more firms/parties to conduct joint Rnd activities..
-RJV’s aim to bridge the gap between public good benefits of knowledge sharing and private incentive for investments.
-Prevent wasteful duplication and pursue research paths otherwise untaken.
RSJ case study1 - VLSI
-Refers to a major RJV within Japans semi conductor industry 1976-79, 5 large firms (Fujitsu, NEC, Hitachi, Mitsubishi,
Toshiba)
-aim was to catch up with U.S. firms in semiconductor industry
-Combo of 6 labs, 1 shared and 5 company led over 1k patends where filed, 59% by a single firm.
Impact:
Boosted Japan’s indutry semiconductors and Helped Japanese firms undercut U.S. rivals with lower costs and prices.
Forced U.S. and European firms to shift toward high-end products like microprocessors and custom chips.
RSJ case study 2 - US sematech
-A RJV formed in 1987 in the US semi conductor industry aim to regain competitive edge after VLSI.
14 firms at peak with initial govermnet support, significant gov support and total bidget (200 mil).
_Despite RJV total RnD spending fell, net decrease by 300 mil in RnD spending among members.
-Firms used the RJV as a replament rther than supplment to private innovatin.
While RJVs can improve efficiency by sharing research, they risk crowding out private investment and must be designed to encourage, not discourage, independent innovation.
3 outcomes and interpretation with the d’Aspremont & Jacquemin Model +welfare
- non-cooperation in both
Firms invest low in R&D due to spillover and compete aggressively in output, resulting in lower quantities.
2.Cooperative R&D + Non-cooperative Production
Firms jointly invest more in R&D, by knowledge and reducing costs, but still compete in the product market, leading to higher output than full non-cooperation.
full cooperation (Collusion): Firms cooperate fully, maximizing joint profits by investing heavily in R&D and limiting output; highest R&D investment but output may be restricted.
No clear best outcome for social welfare without context.
Social welfare improves when both R&D investment and output increase.
describe 3 issues with RJV’s
-Free riding may still exist, within the RJV and outside, without contributing.
-Requrirtes good coordiation between firms otherwise the partnership may misallocate resources –> ineficiences.
-Requires openness, sharing and trust between firms to be effection, knowledge may be withheld.
Define the putpose and impact of the US national cooperative research act of 1984 (NCRA)
It made it easier for R&D joint ventures to avoid big antitrust penalties.
Firms had to prove more to show an antitrust violation happened.
This helped reduce the risk of working together on research.
By lowering legal risks, the Act encouraged more firms to form joint research ventures, leading to greater sharing of knowledge and resources/innvation
Because firms often don’t invest enough alone, joint research encourages more R&D and better technology.
