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Persistence of Profits and the Systematic Search for Knowledge - R&D and profits above the norm

  • Wiberg, Daniel

    ()

    (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology)

Economic 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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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 161.

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Length: 17 pages
Date of creation: 15 Jan 2009
Date of revision:
Handle: RePEc:hhs:cesisp:0161
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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  1. 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.
  2. Glen, Jack & Lee, Kevin & Singh, Ajit, 2001. "Persistence of profitability and competition in emerging markets," Economics Letters, Elsevier, vol. 72(2), pages 247-253, August.
  3. Jan Bentzen & Erik Madsen & Valdemar Smith & Mogens Dilling-Hansen, 2005. "Persistence in Corporate Performance? Empirical Evidence from Panel Unit Root Tests," Empirica, Springer, vol. 32(2), pages 217-230, 06.
  4. Winter, Sidney G., 1984. "Schumpeterian competition in alternative technological regimes," Journal of Economic Behavior & Organization, Elsevier, vol. 5(3-4), pages 287-320.
  5. Dennis C. Mueller & John E. Tilton, 1969. "Research and Development Costs as a Barrier to Entry," Canadian Journal of Economics, Canadian Economics Association, vol. 2(4), pages 570-579, November.
  6. Geroski, Paul A & Jacquemin, Alexis, 1988. "The Persistence of Profits: A European Comparison," Economic Journal, Royal Economic Society, vol. 98(391), pages 375-89, June.
  7. Schwalbach, Joachim & Gra[beta]hoff, Ulrike & Mahmood, Talat, 1989. "The dynamics of corporate profits," European Economic Review, Elsevier, vol. 33(8), pages 1625-1639, October.
  8. Waring, Geoffrey F, 1996. "Industry Differences in the Persistence of Firm-Specific Returns," American Economic Review, American Economic Association, vol. 86(5), pages 1253-65, December.
  9. 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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