Quality-adjusted productivity gain in the propagation of innovation

Satoshi Nakano,Kazuhiko Nishimura

doi:10.1186/s40008-015-0020-9

Abstract

We introduce a class of production function whose inputs and outputs constitute multiples of quality and quantity. Under the efficiency unit approach, we precisely reduce innovation regarding qualitative and quantitative improvements of production to the measurement of quality-adjusted productivity gain. We then consider a system of compatible unit cost functions inclusive of such productivity improvements in any industry, for which we can solve for the ex-post equilibrium to examine the technological structural propagation. In this way, we can evaluate any given innovation with respect to its social welfare gain. We use this framework of multi-industry multi-factor production to study effective industry-wise research and development investment allocations.

Highlights

Research and development (R&D) is considered the central driving force of national competitive advantage
4 Conclusions In this article, we developed a relevant link between R&D investment and its final outcome, social welfare gain
Because we considered industry-wise R&D investment, we focused on the industry-wise local innovation that contributes to each industry, while eliminating any foreign contribution from the input factor

Summary

Background

Research and development (R&D) is considered the central driving force of national competitive advantage. We believe that this policy could impede the harmonious and sound development of the economy, because of mutual interdependencies in current and potential industrial production technologies With this in mind, we are interested in investigating what allocations of public R&D investment could promote effective innovations and gain more welfare. Because economic efficiency equalizes MRS and price ratios, the qualities (the MRS with respect to the standard) and prices used to differentiate the quality of (perfect substitute) commodities become proportional Gordon (1990) under the static equilibrium for a certain technology state (see Fig. 1) Proportionality shifts can be measured via the price change (in the form of a deflator) of a quality-standardized commodity Because such a deflator includes qualitative and quantitative improvements, we call it a quality-adjusted deflator.

Measurement

Local innovation and welfare gain

Example

Conclusions