Persistence of Profits and the Systematic Search for Knowledge - R&D and profits above the norm
AbstractEconomic theory tells us that abnormal industry and firm profits will not persist for any length of time. Any industry or firm making profits in excess of the normal rate of return will attract entrants and this competitive process will erode profits. A substantial amount of research however, has found evidence of persistent profits above the norm. Barriers to entry and exit are often put forward as 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 the association between profits and the systematic search for knowledge is investigated. The results show that 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 are, by doing so, offsetting the erosion of profits and thereby have profits which persistently diverge from the competitive return. It is argued 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 161.
Length: 17 pages
Date of creation: 15 Jan 2009
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; research and development; industrial organization;
Find related papers by JEL classification:
- L00 - Industrial Organization - - General - - - General
- L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
- L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
- 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-2009-01-24 (All new papers)
- NEP-COM-2009-01-24 (Industrial Competition)
- NEP-ENT-2009-01-24 (Entrepreneurship)
- NEP-INO-2009-01-24 (Innovation)
- NEP-IPR-2009-01-24 (Intellectual Property Rights)
- NEP-KNM-2009-01-24 (Knowledge Management & Knowledge Economy)
- NEP-TID-2009-01-24 (Technology & Industrial Dynamics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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