Microeconomic foundations of knowledge-driven growth : modelling the dynamic allocation of R&D resources
This D.Phil, thesis undertakes a theoretical analysis of the microeconomic incentives for scientific and technical knowledge-creating activities at the firm-level, the channels by which these activities impinge on industrial change and economic growth, and the effectiveness of governmental policies formulated to influence these systemic linkages. The motivation for this work is explained in Chapter 2, which reviews the state of the art in new growth theory and puts forward a typology of privately sponsored RandD activities and knowledge resources defining the premises on which the thesis rests. Chapters 3 and 4 investigate the RandD allocation and output decisions of a profitmaximising monopolist investing in exploratory- and applications-oriented research, dealing separately with product and process innovations. The characteristic properties of the optimal time paths are ascertained by means of formal and numerical optimal control methods, including comparative dynamics. The complementarity between the two modes of research is shown to generate increasing returns, but these turn out to be short-lived. The model is extended in Chapter 5 to study the development of multiple product lines. Knowledge spillovers and demand-side externalities across successive product lines can provide the basis for continued spending on RandD, allowing sustained output growth and profitability. Chapters 6 to 8 turn to the challenges of modelling the irreducible elements of uncertainty in the innovation process and their bearing upon the dynamics of market competition and industry structure. In the sequential game theoretic model introduced, firms can invest in fundamentally uncertain "innovative-RandD," or wait until the uncertainty surrounding original innovation is dispelled and invest in certain but costly "imitative-RandD." These decisions are taken in a vertically and horizontally differentiated market where noninnovating firms can compete with a "traditional" product. The industry-wide scale of RandD investments and the related evolution in market structure are determined endogenously. To do so, a symmetric equilibrium concept is defined and its uniqueness established. The model can support Schumpeterian industry evolutions, in which surges of innovative entry are followed by waves of imitation, and ensuing "creative destruction" in which traditional producers are driven out of the industry and innovators' rents are eventually eroded. Numerical simulations are employed in Chapter 7 to provide further insights into the evolution of product development, market structure, pricing, firm growth, profitability, and consumer welfare. The final chapter considers the implications of this game theoretic approach for competition and innovation policies.