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Chapter 22: Problem 4

Why are firms likely to underinvest in research and development? Briefly discuss three ways in which government policy can increase the accumulation of knowledge capital.

Short Answer

Expert verified
Firms are likely to underinvest in R&D due to high costs, risks, and potential for others to duplicate the findings with less expenditure. Alternatively, governments can increase knowledge capital accumulation by providing R&D subsidies, investing in public research institutions, and protecting intellectual property rights.

Step by step solution

01

Understanding Underinvestment in R&D

Firms may underinvest in research and development (R&D) due to the high costs associated, the high risks involved, and the fact that benefits often do not come until the long term. Furthermore, once the research is conducted, there's a possibility that other firms can replicate the findings with lower expenditure and benefiting from the initial firm's investment. This makes the return on investment uncertain for the firm performing the R&D.
02

Explaining the role of Government Policy

There are several ways in which government policy can increase the accumulation of knowledge capital. Firstly, governments can provide subsidies or tax credits for R&D, incentivizing firms to commit to such endeavours. Secondly, governments can invest in public research institutions to encourage the generation of knowledge capital. Lastly, governments can enact legislation to protect intellectual property rights, ensuring that firms will benefit directly from their innovative research.
03

Concluding Remarks

In conclusion, firms typically underinvest in R&D activities due to the high cost, risk, and the potential for other companies to replicate research results without bearing the original investment. Government policy can mitigate these issues with the provision of R&D subsidies, investment in public research, and through the protection of intellectual property rights.

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Most popular questions from this chapter

People who live in rural areas often have less access to capital and, as a result, their productivity is lower on average than the productivity of people who live in cities. An article in the New York Times quoted a financial analyst as arguing that "the core driver" of economic growth in China "is the simple process of urbanization." a. What does the analyst mean by the "process of urbanization"? b. If the analyst is correct that urbanization is the core driver of economic growth in China, would we expect that China will be able to continue to experience high rates of economic growth in the long run? Briefly explain.

Why does a country's economic growth rate matter?

An article in the Economist on the Mexican economy noted, "A huge, unproductive informal sector and general lawlessness also drag the economy down." If these factors were the main barriers to more rapid economic growth in Mexico, would that be good news or bad news for the Mexican government's attempts to increase its economy's growth rate? Briefly explain.

Writing in 2016 , economist Robert Gordon of Northwestern University stated his views of the effects of information technology on the economy: We don't eat computers or wear them or drive to work in them or let them cut our hair. We live in dwelling units that have appliances much like those of the \(1950 \mathrm{~s}\), and we drive in motor vehicles that perform the same functions as in the \(1950 \mathrm{~s}\), albeit with more convenience and safety.... Most of the economy has already benefited from the Internet and web revolution, and in this sphere of the economic activity, methods of production have been little changed over the past decade \(\ldots .\) The revolutions in everyday life made possible by e-commerce and search engines were already well established [by 2004]. If Gordon's observations about the information revolution are correct, what are the implications for future labor productivity growth rates in the United States?

(Related to the Apply the Concept on page 742) Economist Charles Kenny of the Center for Global Development has argued: The process technologies-institutions like laws and inventory management systems that appear central to raising incomes per capita flow less like water and more like bricks. But ideas and inventions \(-\) the importance of [education] and vaccines for DPT - really might flow more easily across borders and over distances. If Kenny is correct, what are the implications of these facts for the ability of low-income countries to rapidly increase their rates of growth of real GDP per capita in the decades ahead? What are the implications for the ability of these countries to increase their standards of living? Briefly explain.
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