Innovation, catch-up, and leadership in science-based industries

Abstract

In this paper, we seek to shed new light on the sources of industrial leadership and catch-up in science-based industries. We propose an evolutionary model which incorporates scientists' training and migration, endogenous R&D decisions and the possibility of funding capital accumulation through debt. The analysis of the model allows us to characterize a robust pattern of industrial catch-up. Likewise, the sensitivity analysis shows which parameters act as pro-catch up factors or slow down the process. The identification of stationary-state conditions of the model helps us to interpret the simulations, and highlights crucial interactions between technology-supporting institutions and market demand at the basis of industrial catch-up. Finally, the robustness analysis reveals further interdependencies among innovation, scientist mobility and demand.

Pricing routines and industrial dynamics

“…Of course, looking at (1) we see that firms have an incentive to fix high prices and increase profitability. Nevertheless, those firms with higher prices may lose market share, and this effect reduces profits (see (1)). Thus, each firm faces a specific trade-off between increasing prices (to raise profits) or lowering prices to maintain or gain market share (which also raises profits).…”

“…More precisely, we assume that firms adaptively vary prices by applying a mark-up on the unit cost c=w=1with the mark-up being dependent on the changing market shares. We use the following plausible routines, which are compatible with the theory of mark-up pricing in the literature (Bloch and Metcalfe 2018, Almudi et al 2012, 2013, Winter 1984, Kalecki 1971):…”

“…As we have said, firms administer their prices (equations ( 4) and ( 5)) according to the perceived evolution of demand (market share). Therefore, apart from equation ( 10) driving market competition, and equation (1) in which we see profit evolution, we need to incorporate the pricing equations ( 4) and ( 5) to study the stability and dynamics of the market. We shall study the stability of the replicator dynamics (10), taking first the pricing routines of equation ( 4), and then those of equation ( 5).…”

Industry dynamics, technological regimes and the role of demand

“…For simplicity, we will consider the following pricing routine (Almudi et al 2012;Fatas-Villafranca and Saura 2004):…”

“…We make this simplifying assumption to focus on the analysis of the market competitive process. InAlmudi et al (2012) we consider growth and analyze its effects on industrial dynamics.…”