Imitation and R&D Incentives

   We know that product and process innovation can explain us how technological advance can maximize firm’s profit, but it also it may state a potential problem in economics called imitation problem, situation in which firm’s rivals may imitate newly invented product or process, so that profit gained by firm that initiated R&D process is greatly reduced. An example can be, a firm buys a high-quality notebook from other one that has a great success in market sales and study it piece by piece and then reproduce entire new model in a computer that is an imitation of original one. This technique was used many times in our world’s market. This type of imitation is actually a legitimate one, so it is often the main path to widespread of innovation and diffusion.
   However, the dominant firm in an industry that is making big profits may let other small firms to spend great quantity of money on product and process of innovation and analyze their success and losses. This firm then quickly can become the second firm that uses these innovations if they are successful. This is called fast-second strategy, strategy by which a second firm uses innovation and R&D results of another firm, so that latter one incurs all cost of innovation and R&D expenditures.

Benefit of being first
   Fast-second strategy and imitation may raise an important question: is there any incentive to be the first firm that incurs all cost and expenditures if the competitors may imitate innovated product? Why not imitate others successful innovations and let them bear the cost of R&D and innovation process? Even this idea is a plausible there are some advantages and protections for the firms that take the lead in this innovation competition. Let’s describe some of them:

Patents
   Some technological innovations and breakthroughs may be patented. If a product or production process in patented it can’t be imitated for about two decades. The purpose of patents is to reduce imitation and to help other firm to engage in R&D with possibility of gaining of high profits. And if for example one firm clones the new innovated products of another firm then the latter one might be included in a patent-infringement lawsuit and pay back all revenues lost by the firm which patented its product.

Copyright and trademarks
   Copyrights protect publishers of books, various articles, movies, musical compositions from having their works copied. Trademarks give the exclusive opportunity to innovators to use a specific product name (Nokia, Ferrari, McDonald’s). These legal protections help innovators to increase their incentive for product innovation.

Brand Recognition
   Brand-name recognition gives innovator a major marketing advantage for several years. Consumers identify a product with the firm that first introduced and popularized it in the world’s market, for example Kellogg’s Corn Flakes, Sony’s Walkman).

Trade secrets
   Some innovations however include some trade secrets, without which imitation isn’t possible. A very popular example is Coca-Cola which has a secret formula for its drinks. Other firms have some special production technique that is known only to them. A relative advantage is learning-by doing, kind of specialization that allows them to achieve cost reductions. The innovator’s low cost may enable to continue its profits even after imitations are spread in the market.

  Time Lags
   Time lags between innovation and imitation often help innovating firms to realize high economic profits, since the firm that imitates needs some time to learn properties of new innovated good. Once imitators have learnt all these particularities of that good, it needs to design a substitute good and construct a factory that will produce it. Different entry barriers like big amount of funding, economies of scale, and price-cutting may increase the time between innovation and imitation. That’s why it may take several years before rival firms can successful imitate new product and earn some innovator’s market share. That’s why innovator will continue its profits.

Buyouts
   Another advantage of being first may be a buyout, purchase of innovating firm by a larger firm. In this case innovative entrepreneurs will get their rewards immediately in form of cash or shares from the purchasing firm, rather than waiting for uncertain future profits from their own production and efforts.

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Role of Entrepreneurs and Innovators

       Entrepreneurs: Entrepreneur is an innovator, initiator and a risk bearer- an element that combines labor, land and capital resources in new and original way so that this business may produce new goods and services. In past a single individual carried out all entrepreneur functions in a firm, but nowadays because of more technological complex economy, entrepreneurship is more likely to be carried out by entrepreneurial teams. Such teams may include two or three people working as their own bosses or developing new ideas, or this team may also consist of a larger number of entrepreneurs who are administrated their own financial resources.
   Other innovators In the process of producing are included other people who don’t bear personal financial risk. They may be scientists, key executives, or other employees engaged in Research and Development activities (R&D). (They are sometimes called intrapreneurs)
Start-Ups
   Sometimes entrepreneurs form some small companies called start-ups, these firms focus of developing and introducing new products or on creating a new production or distribution technique. An example from history, was when two people working in their garages, formed such a start-up in 1970s. After some time they have founded their own company: Apple Computers.
Innovating existing firms
   Innovators also work in already existing corporations, whether these are large or small. In this case innovators are salaried workers which are paid very well and get substantial bonuses and shares of the profit. R&D work in large corporations has produced very important technological advances in different production systems.
    However, some large firms have split their R&D and manufacturing part of firm and have formed new, more innovative firms.
Anticipating Future
   It’s extremely difficult to anticipate the future but that’s what innovators are trying to do. These people who have strong anticipation abilities and are highly-determined may be able to introduce new and improved products at the right time. If they do so, the rewards may very big, monetary and nonmonetary ones. In order to develop a product one should be very creative and rewards for his success may be some intangible rewards like personal satisfaction. Winners of this competition of innovations can reap huge monetary rewards in for of economic profits, stock appreciation and very big bonuses. An example can be Paul Allen and Bill Gates who founded Microsoft in 1970s and received by 2000 approximately 60 billion of dollars.
   Past success offer innovators and entrepreneurs access to further innovations that may anticipate buyers’ wants. Even if they may not succeed the second time, a try is also important. Market doesn’t care if the entrepreneurs and innovators are Canadian, Americans, Japanese, Chinese or Swiss. Main scope is innovation and better society.
Government and University Scientific Research
   Very small amount of money from R&D is spent on scientific research, because scientific principles can’t be patented and they don’t have immediate commercial uses. However, scientific knowledge is very important for technological advance. That’s why entrepreneurs try to find out the output of universities and government labs’ researches.
   Government and university labs have been the place where a lot of amazing technological inventions have been discovered. Computers and biotechnology are some results of experiments made there. That’s why firms tend to invest in university researches that are related to their products. Business founding of R&D at university has grow rapidly. Today scientists and universities understand that their work may have some commercial value, that’s why they are teaming up with innovators and share possible profits. However, some firms find it more profitable to make researches on their own. This is more common in pharmaceutical and computer industry where it’s uncommon to distribute new scientific knowledge generated in their labs.

Technological advance: invention, innovation, and diffusion.

       In economics technological advantage is new and better goods and services and new and better ways of producing or spreading them. This process occurs over a theoretical time called very long run, than can be as short as few weeks or as long as many years. Let’s recall that in all our market systems (pure competition, monopolistic competition, oligopoly and pure monopoly), the short run is a period in which technology, plant are fixed, however in the long run , technology is constant but the firms can change their plant size and are free to enter and exit the industry. In contrast, very long run is a period in which technology can change and firm can develop and supply totally new products.
   It’s known that technological advantage shifts product possibility curve upward, enabling economy to achieve more goods and more services. Technological advantage can be is made up of three parts: invention, innovation, and diffusion.
 Invention
   The first step to technological advantage is invention: the discovery of product or process of producing by using imagination, thinking and experimenting. Invention is a process and the result of it is also called invention. Invention is based in scientific knowledge and it is the result of work of individuals who work on their own or as members of Research and Development (R&D) departments in firms. Government encourages invention by providing patents, right to sell any innovative process of production, machines or products in a set time.
Innovation
Innovation is directly related to invention. While invention is “discovery and proof of workability”, innovation is the successful introduction of new product (invention) in the market, the first use of a new method of producing, or the creation of new form of business firm. There are two types of innovation: product innovation, improving products and services, and process innovation, which is improved ways of production and spreading of these inventions in the market.
In contrast to invention, innovations cannot be patented. Innovation needs not to weaken or destroy the existing firms. Because new products and processes threaten firms’ survival, existing firms have a high incentive to engage into research and development (R&D) process continuously. These innovative products and processes enable firm to earn higher revenue or to maintain the present ones. Innovation can strengthen or weaken market power.
 Diffusion
   Diffusion is the process of spreading of inventions through imitating or copying. To take the advantage of new profits or to slow down disappearing of others, all firms try to implement the innovations. In most of the cases innovation leads to widespread imitation (that’s diffusion) of inventions. For example, soon after McDonald’s introduced the fast-food hamburger, Burger Kings also started to produce it, since it offered high revenues for the firms that supplied this good.
Research and Development (R&D) Expenditures
When it’s related to business research and development means the efforts towards inventions, innovations and diffusion. Many countries engage in R&D of national defense, so that annually they spend thousands of billions of dollars.
Importance of Technological Advantage
   Technological advances for many centuries were viewed ad external to economies, like a force to which economies adjust. Periodically new advances in scientific and technological knowledge occurred. Firms and industries, incorporated new technology into their products and production process to increase or to maintain their revenues. After making some adjustments, they continue to settle into long-run equilibrium position. Economists believe that technological advantage is related to advance of science, which is very important for market system. Some of economists see capitalism is the as driving force of technological advantage. Technological advantage arises from rivalry among individuals and firms that motivates them to seek and exploit new opportunities of profit and of expanding. This rivalry occurs between new firms and existing ones. Entrepreneurs and innovators are viewed as heart of technological advantage.