Technical Report Innovation by Heterogeneous Leaders

Iwaisako, Tatsuro  ,  Ohki, Kazuyoshi

15-30pp.1 - 19 , 2015-11 , Graduate School of Economics and Osaka School of International Public Policy (OSIPP) Osaka University
Description
We develop a Schumpeterian growth model that differs from the quality-ladder model in the following two ways. First, the size of the quality increment is determined by a random draw from a given distribution, and consequently leader firms are different in terms of their quality lead over their followers, and thus have different profit flows. Second, we assume that the R&D technology of leader firms exhibits diminishing returns, and consequently some leader firms engage in R&D activities. The results show that leaders with larger quality leads over their followers make smaller R&D investments and tend to be replaced more rapidly; this result is consistent with the behaviors of some previous leader firms such as Sony and Eastman–Kodak. Moreover, we show that subsidizing followers’ R&D can promote leaders’ aggregate R&D. Subsidies for followers’ R&D promote their R&D and impede individual leader firms’ R&D. However, promotion of followers’ R&D decreases the number of leaders with larger quality leads and smaller R&D investments and increases that of leaders with smaller quality leads and larger R&D investments. If this positive effect from a changed distribution outweighs the negative effects on individual firms’ R&D, promotion of followers’ R&D increases leaders’ aggregate R&D.

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