Reading Summary Week 2, 09/08/2015

Innovation Management & Strategy (MSB510), By Prof. Kim WonJoon

Prepared by : Riri Kusumarani /20155636

Mansfield E. (1972): Contribution of R&D to economic growth in the United States.

Science 175, 477-486.

Key Research Question and Main Finding

-Understanding the relationship between R&D and economic growth in the U.S

- Technology & R&D play important role in economic growth of U.S

∙ Main discussion in Literature Review

∙ Connection of the availability of R&D in certain industries to the growth of that certain

industries.

∙ Does the amount of funding spent to R&D have an impact to productivity and welfare?

∙ Difficulties in measuring impact for economic growth from R&D contribution

∙ Difficulties in deciding measurement for R&D Contribution

∙ R&D in Individual industries lead to higher output level, cyclical fluctuation,productivity

increase & changes, value added to firm

∙ Mansfield explores the status of R&D in US in 1962 which mainly focused on defense &

space industry. At that time, R&D were mostly concentrated in product and also

development which leads to development of modest-advance technology.

∙ Research are needed not only product-wise but also in process wise

Hypothesis:

Invention brings little direct value to company, which lead industries allocate only a few resources

in R&D

The very nature of R&D that is risky leads to lower level of allocation for R&D

∙ Method (Data, Methodology)

∙ Literature Review Paper

∙ Case Study

∙ Key Results

∙ There are fundamental measurement issues when trying to determine the contribution of

R&D to economic growth in the US (p.478)

∙ Mansfield describes six important areas that need future research as stated from page 482-

483.

∙ Limitations

∙ It is bound to see from 1962 point of view

Critics & Extension Points

This is a very old article written and published in 1972, however the subject is still can be applied

in today’s situation of R&D. Technological change as the result of R&D have contribute for US

case growth.

This study will need to adjust from today’s point of view and compare effect on R&D to

developing countries growth.

Arrow, Kenneth. 1962. “Economic Welfare and the Allocation of Resources for Invention.”

In The Rate and Direction of Inventive Activity: Economic and Social Factors, pp. 609-

625. Princeton, NJ: Princeton University Press. READ pp. 618-626.

Key Research Question and Main Finding

The relation between allocation of resources for invention and the economic welfare of a country

in a perfect competition market.

To what extent does perfect competition lead to an optimal allocation of resources?

Main discussion in Literature Review

Possible failure of perfect competition to achieve optimality in resource allocation :

indivisibilites,inappropriability and uncertainty

Discussion of theory regarding resource allocation under uncertainty

Information as commodity

Invention as process for production of information

Example from production uncertainty = Agricultural production; Producers have to decide

an input with an unknown output due to state of nature. If producers put weather as

variable for state of nature; then a number of expected input will decide number of seed

when weather is good/bad.

In a all commodity-option economy (Critical Ideal Condition) : producers know the exact

output under uncertainty; revenue is determined for maximizing profits.

In a non-ideal condition : producers decide inputs; outputs are determined by input & state

of nature; Prices are set and those that will prevail is affected by state of nature. Any

unwillingness to take risks will give rise to a nonoptimal allocation of resources

Presence of insurance can shift risk and also makes it possible to have an optimal allocation

of resources. However, insurance is also limited. Therefore, a co-insurance is looked as the

solution for compromising between allocation of risk-taking action and incentive effects

Another way to shift risk is cost-plus contract where a combination of fixed-price contract

and insurance against cost is applied

Who should bear the risk? If risks are high , no firms will allocate their resources to

invention. To solve this ; co-insurance and cost-plus contract can be considered.

Under uncertainty, information will be regarded having economic value. Those who acquire

it can respond better to market demand.

Information is a commodity with a peculiar characteristic

Incentive to invest can exist. This incentive brings profit to the inventor and also market in

general

Incentive to invest is less under monopolistic than under competitive condition because in

monopolistic condition, appropriability will be greater.

What is the issue

Little discussion regarding allocation of resources under uncertain condition

Does incentive to invest differs in monopoly & competitive economy?

Key Results

∙ A free enterprise economy to underinvest in invention and research because of high-risk,

product only appropriate for a limited time and increasing returns in use

∙ In order to reach optimal allocation of resource in invention, it’s important that government

is not ruled by profit-loss criteria

Main Implications and contributions

This article explore the effect on allocation for resource in invention can lead to a more

welfare economy

Critics & Extension Points

Arrows look into invention as a production of knowledge in which he explores problems in

different market type : monopolistic and competitive .It is more likely to extend his research into

patent-related issue . Whether a patent will increase likeliness to invention or the other way around.

Whether a patent will be less in monopoly or competitive market

Romer, Paul M., "Endogenous Technological Change," Journal of Political Economy,

1990, 98 (5, Part 2--Supplement): S71-S102.

Key Research Question and Main Finding

How human capital determines the rate of growth by proposing a model of growth

Main Discussion

What has been done

Through her proposed model, she shows that Human Capital is affecting Growth of

economy

What is the issue

Too little human capital is devoted to research

Large population is not sufficient to generate growth

Key research questions (Hypothesis)

Fixed cost is affecting increase in profit of the market growth

A higher market size will lead to growth of income level, welfare and rate of growth

Population is not the right measurement for market size

The presence of large domestic market in high populated countries is not a substitute

for trade

∙ Method (Data, Methodology)

∙ Data

Romer explores previous models of growth and analyze why variables are not suitable

anymore.

∙ (Econometric) Model can be seen on page S92

∙ Key Results

∙ Human Capital will define a faster growth of economy

∙ Free international trade is an option to countries who want to speed up growth

∙ Developed economies in today’s era permited rates of growth of income per capita

∙ Low levels of human capital help to explain why growth is not observed in underdeveloped

economies

∙ If there’s no technological change means no growth

Main Implications and contributions

- Her Model made it possible to determine growth rate from parameters such as human

capital, labor and technological change.

- Decision to participate in trade will be important for a country that has large population

- However, population is not the most important factor, But Human capital is.

Limitations

- it does not differentiate between growth in developing and developed countries

Critics & Extension Points

- It’s interesting for me to read this article despite the calculation that I barely understand.

- This paper shows us that human capital is important for economic growth and by means

of human capital is knowledge, habit, personality and creativity.

- Extension point for this paper is to explore factors from different perspective such as

developing countries human capital and also policy side.