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Recovering the sunk costs of R&D: the moulds industry case

Santos, Carlos Daniel (2009) Recovering the sunk costs of R&D: the moulds industry case. CEP Discussion Paper, No. 958. Centre for Economic Performance, London School of Economics and Political Science, London, UK.

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Abstract

Sunk costs for R&D are an important determinant of the level of innovation in the economy. In this paper I recover them using a Markov equilibrium framework. The contribution is twofold. First, a model of industry dynamics which accounts for selection into R&D, capital accumulation and entry/exit is proposed. The industry state is summarized by an aggregate state with the advantage that it avoids the "curse of dimensionality". Second, the estimated sunk costs of R&D for the Portuguese moulds industry are shown to be important (3.4 million Euros). They become particularly relevant since the industry is mostly populated by small firms. Institutional changes in the early 1990s generated an increase in demand from European car makers and created the incentives for firms to pay the costs of investment. Trade-induced innovation reinforced the selection effect by which international trade leads to productivity growth. Finally, using the estimated parameters, simulations evaluate the effects of changes in market size, sunk costs and entry costs.

Item Type: Monograph (Discussion Paper)
Official URL: http://cep.lse.ac.uk/
Additional Information: © 2009 The author
Library of Congress subject classification: H Social Sciences > HB Economic Theory
H Social Sciences > HD Industries. Land use. Labor
Journal of Economic Literature Classification System: L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior > L22 - Firm Organization and Market Structure: Markets vs. Hierarchies; Vertical Integration; Conglomerates; Subsidiaries
O - Economic Development, Technological Change, and Growth > O3 - Technological Change; Research and Development > O31 - Innovation and Invention: Processes and Incentives
D - Microeconomics > D2 - Production and Organizations > D21 - Firm Behavior
L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L11 - Production, Pricing, and Market Structure; Size Distribution of Firms
D - Microeconomics > D9 - Intertemporal Choice and Growth > D92 - Intertemporal Firm Choice and Growth, Investment, or Financing
C - Mathematical and Quantitative Methods > C6 - Mathematical Methods and Programming > C61 - Optimization Techniques; Programming Models; Dynamic Analysis
Sets: Collections > Economists Online
Research centres and groups > Centre for Economic Performance (CEP)
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Identification Number: No. 958
Date Deposited: 16 Jul 2010 15:21
URL: http://eprints.lse.ac.uk/28689/

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