Week 6 Lecture 2 Flashcards

(10 cards)

1
Q

Define innovation

A

Innovation is an application of new ideas to the products, processes, or other aspects of the activities of a firm that
lead to increased value

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2
Q

What does R&D include?

A

R&D includes:
- Basic research: Work done to acquire new knowledge without any particular application or use in view
- Applied research: Application of the existing knowledge to problems involved involved in creating new products or processes
- Development: Systematic work on applied research

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3
Q

What are the two types of innovation?

A
  • Product innovation: the introduction of a new product or a significant qualitative change in an existing product
  • Process innovation: the introduction of a new process for making or delivering goods and
    services
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4
Q

Define R&D spending

A

R&D spending is the monetary value
of resources a company spent on R&D

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5
Q

Give the two definitions of R&D intensity

A
  • R&D intensity is a share of the expenditures on R&D in the total revenue of a company
  • R&D intensity = R&D expenditure / Total revenue
  • R&D intensity is a share of the aggregated expenditure on R&D in the GDP of a country
  • R&D intensity = Total R&D expenditure / GDP
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6
Q

What are the problems associated with R&D?

A

1- Knowledge is a public good. Private provision of knowledge is suboptimal
2- Spillover effect: Innovation by one firm delivers a spillover effect (positive externality) on other firms
3- Patent race and duplication: If one firm manages to get the patent before the other they have wasted research money

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7
Q

What are some possible solutions to the problems associated with R&D?

A
  • Public provision of new knowledge eg. institutions and research centres
  • Firm cooperation and collaboration
  • Protection of intellectual property rights
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8
Q

Briefly explain the incentives to innovate in a monopoly market structure

A

There are modest incentives to innovate as:
- Potential gains are small relative to the monopolistic profits the firm earns
- The opportunities are good as a monopoly can finance expensive R&D projects and bear risks
- However the overall incentive is rather low as the firm has no one to compete with in innovations

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9
Q

Briefly explain the incentives to innovate in highly competitive industries

A

In highly competitive industries there are weak incentives to innovate as:
- Although potential gains are large, the opportunities approach 0 as a small firm cannot finance expensive R&D projects and attract high-risk investment
- With many firms in the market the likelihood of duplicating results is high and the risk of irrecovareable costs is also high

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10
Q

Briefly explain the incentives to innovate in concentrated industries market structure

A

In concentrated industries there are strong incentives to innovate as:
- Potential gains are significant as a successful firm can become a monopoly or a dominant firm
- The opportunities are favourable as in concentrated industries firms are large enough to finance R&D projects, attract capital and bear risks
- In oligopolies it is easier to negotiate and collaborate therefore reducing the likelihood of duplication

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