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Persistence of profits and the systematic search for knowledge - R&D links to firm above-norm profits

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Author Info

  • Eklund, Johan

    ()
    (Jönköping International Business School (JIBS) and CESIS)

  • Wiberg, Daniel

    ()
    (Jönköping International Business School (JIBS) and CESIS)

Abstract

Economic theory tells us that abnormal firm and industry profits will not persist for any significant length of time. Any firm or industry making profits in excess of the normal rate of return will attract entrants and this competitive process will erode profits. However, a substantial amount of research has found evidence of persistent profits above the norm. Barriers to entry and exit, is an often put forward explanation to this anomaly. In the absence of, or with low barriers to entry and exit, this reasoning provides little help in explaining why these above-norm profits arise and persist. In this paper we explore the links between the systematic search for knowledge and the persistence of profits. By investing in research and development firms may succeed in creating products or services that are preferred by the market and/or find a more cost efficient method of production. Corporations that systematically invest in research and development may, by doing this, offset the erosion of profits and thereby have persistently high profits which diverge from the competitive return.We argue that even in the absence of significant barriers to entry and exit profits may persist. This can be accredited to a systematic search for knowledge through research and development.

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Bibliographic Info

Paper provided by Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies in its series Working Paper Series in Economics and Institutions of Innovation with number 85.

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Length: 17 pages
Date of creation: 13 Mar 2007
Date of revision:
Handle: RePEc:hhs:cesisp:0085

Contact details of provider:
Postal: CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology, SE-100 44 Stockholm, Sweden
Phone: +46 8 790 95 63
Web page: http://www.infra.kth.se/cesis/
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Related research

Keywords: Persistence of Profits; Profit Dynamics; R&D; Innovation Activity; Knowledge;

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  1. Zvi Griliches, 1984. "R & D, Patents, and Productivity," NBER Books, National Bureau of Economic Research, Inc, number gril84-1.
  2. Mueller, Dennis C, 1977. "The Persistence of Profits above the Norm," Economica, London School of Economics and Political Science, vol. 44(176), pages 369-80, November.
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  10. Goddard, J. A. & Wilson, J. O. S., 1999. "The persistence of profit: a new empirical interpretation," International Journal of Industrial Organization, Elsevier, vol. 17(5), pages 663-687, July.
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Cited by:
  1. Johansson, Börje & Lööf, Hans, 2008. "The Impact of Firm’s R&D Strategy on Profit and Productivity," Working Paper Series in Economics and Institutions of Innovation 156, Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies.

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