Cohen: trade-off between firm size and diversity
6 important questions on Cohen: trade-off between firm size and diversity
Since writings of Schumpeter, discussion LE or SE enigine of technological process. Both have their advantages
- LE: scale economies, superior human and capital infrastructure
- SE: less bureacracy, they stimulate creativity and agility in response to economic opportunity
In each industry, all firms will spend an amount on R&D, that is proportional to their ex ante sales.
The result behind this is
- the greater the firms sales, the greater the returns from any given R&D effort
- So, the larger the optimal expenditure on R&D
Two central tenets of Cohen's model
- returns to R&D alre scaled by size of the firm
- diffences in firm R&D intensities are attributable to differences across firms in the number of approaches to innovation pursued
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Cohen says that firms will be limited in their ability to change their expertise, and in long run new firms with more expertise will replace industry leaders.
The consequence of this process is
- In each industry there will be an array of firms of different sizes and capabilities
- Each have different views about which approaches to innovation to pursue
In Cohen's model, the industry is assumed to b
- a subject to ongoing technological change
- firms are uncertain about profits of innovation, in both costs as returns
Advantages of Large Size
- The returns to R&D are scaled by firms ex ante sales.
- Larger the firm, unit costs are lower, with larger level of output, so greater profits
- Merged firm can appropriate returns from its innovation better, then either firm alone
- By redistributing sales and R&D expenditures from SE to LE, a greater number of socially efficient R&D projects will increase amout of technological change
- Apply innovations to joint output, so firms collectively profit from R&D, while non could profit individually
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