Persistence of profits and the systematic search for knowledge - R&D links to firm above-norm profits
AbstractEconomic 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 InfoPaper 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.
Length: 17 pages
Date of creation: 13 Mar 2007
Date of revision:
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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/
More information through EDIRC
Persistence of Profits; Profit Dynamics; R&D; Innovation Activity; Knowledge;
Find related papers by JEL classification:
- C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
- O10 - Economic Development, Technological Change, and Growth - - Economic Development - - - General
- O32 - Economic Development, Technological Change, and Growth - - Technological Change; Research and Development; Intellectual Property Rights - - - Management of Technological Innovation and R&D
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-03-24 (All new papers)
- NEP-BEC-2007-03-24 (Business Economics)
- NEP-COM-2007-03-24 (Industrial Competition)
- NEP-ENT-2007-03-24 (Entrepreneurship)
- NEP-INO-2007-03-24 (Innovation)
- NEP-IPR-2007-03-24 (Intellectual Property Rights)
- NEP-KNM-2007-03-24 (Knowledge Management & Knowledge Economy)
- NEP-MIC-2007-03-24 (Microeconomics)
- NEP-TID-2007-03-24 (Technology & Industrial Dynamics)
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