Knowledge Transfer, Transitional Dynamics and Optimal Research & Development Policy in a Dynamic Monopoly Setting

Jürgen Antony,Torben Klarl

doi:10.1007/s11151-020-09779-7

Abstract

This paper focuses on the question of whether or not a reduction of the knowledge barrier is good for welfare. Based on a dynamic monopoly setting with simultaneous investment decisions in process as well as in product Research & Development (R&D), we show that a reduction of the knowledge barrier has ambiguous welfare consequences: due to a lower knowledge barrier, product quality and welfare increase in the short-run. However, this may not necessarily be the case in the long-run. One reason is that a positive long-lasting knowledge barrier shock triggers the monopolist sub-optimally to reduce its product R&D investments today and in the future at the cost of future product quality. This in turn may reduce welfare. Accordingly, to realize the first-best level of product quality, the long-run optimal R&D subsidy rate for product innovations increases with a reduction of the knowledge barrier.

Highlights

Knowledge and its management are of crucial importance for a firm’s inventiveness and, is essential for its sustainable competitive advantage
Based on a dynamic monopoly setting with simultaneous investment decisions in process as well as in product Research & Development (R&D), the main impetus of the paper is to show that a reduction of the knowledge barrier due to long-lasting shocks has ambiguous welfare consequences: With the “standard” focus solely on the long-run, welfare effects are ambiguous as welfare directly depends on the calibrated parameter space
This finding has an important policy-implication: if a policy maker focuses on the short-run welfare effects of a decrease of the knowledge barrier, the policy recommendation that might be optimal in the long-run could be nonoptimal in the short-run

Summary

Introduction

Knowledge and its management are of crucial importance for a firm’s inventiveness and, is essential for its sustainable competitive advantage. New knowledge—accessed externally or internally— generates types of knowledge barriers, which may hinder the firm’s ability to exploit the accumulated and existing stock of knowledge (Caldwell 1967). In general and applied to an economic setting, the knowledge barrier refers to any impediment that prevents existing knowledge from being used elsewhere. Knowledge barriers are relevant within the firm as well as with respect to knowledge that is external to the firm The former is known as internal stickiness (Szulanski 1996, 2003).. The former is known as internal stickiness (Szulanski 1996, 2003).2 Consistent with this somewhat vague concept of knowledge barriers, we consider anything that prevents existing knowledge from being applied, transferred, shared or diffused. We distinguish explicitly between barriers to accessing internal knowledge and to accessing external existing knowledge

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