The document discusses the contributions of research and development (R&D) to economic growth in the U.S., highlighting the challenges in measuring R&D's impact and emphasizing the need for future research. It also explores the relationship between resource allocation for invention and economic welfare, noting that imperfect competition may lead to suboptimal resource allocation. Additionally, it addresses the role of human capital in economic growth, advocating for more focus on human capital as a key factor in driving growth.

1. Reading Summary Week 2, 09/08/2015
Innovation Management & Strategy (MSB510), By Prof. Kim WonJoon
Prepared by : Riri Kusumarani /20155636
Mansfield E. (1972): Contribution of R&D to economic growth in the United States.
Science 175, 477-486.
Key Research Question and Main Finding
-Understanding the relationship between R&D and economic growth in the U.S
- Technology & R&D play important role in economic growth of U.S
∙ Main discussion in Literature Review
∙ Connection of the availabilityof R&D in certain industries to the growth of that certain
industries.
∙ Does the amount of funding spent to R&D have an impact to productivity and welfare?
∙ Difficulties in measuring impact for economic growth from R&D contribution
∙ Difficulties in deciding measurement for R&D Contribution
∙ R&D in Individual industries lead to higher output level, cyclical fluctuation,productivity
increase & changes, value added to firm
∙ Mansfield explores the status of R&D in US in 1962 which mainly focused on defense &
space industry. At that time, R&D were mostly concentrated in product and also
development which leads to development of modest-advance technology.
∙ Research are needed not only product-wise but also in process wise
Hypothesis:
Invention brings little direct valueto company, which lead industries allocate only a few resources
in R&D
The very nature of R&D that is risky leads to lower level of allocation for R&D
∙ Method (Data, Methodology)
∙ Literature Review Paper
∙ Case Study
∙ Key Results
∙ There are fundamental measurement issues when trying to determine the contribution of
R&D to economic growth in the US (p.478)

2. ∙ Mansfield describes six important areas that need future research as stated from page 482-
483.
∙ Limitations
∙ It is bound to see from 1962 point of view
Critics & Extension Points
This is a very old article written and published in 1972, however the subject is still can be applied
in today’s situation of R&D. Technological change as the result of R&D have contribute for US
case growth.
This study will need to adjust from today’s point of view and compare effect on R&D to
developing countries growth.

3. Arrow,Kenneth. 1962. “Economic Welfare and the Allocation of Resourcesfor Invention.”
In The Rate and Direction of Inventive Activity: Economic and Social Factors, pp. 609-
625. Princeton, NJ: Princeton University Press. READ pp. 618-626.
Key Research Question and Main Finding
The relation between allocation of resources for invention and the economic welfare of a country
in a perfect competition market.
To what extent does perfect competition lead to an optimal allocation of resources?
Main discussion in Literature Review
 Possible failure of perfect competition to achieve optimality in resource allocation :
indivisibilites,inappropriability and uncertainty
 Discussion of theory regarding resource allocation under uncertainty
 Information as commodity
 Invention as process for production of information
 Example from production uncertainty = Agricultural production; Producers have to decide
an input with an unknown output due to state of nature. If producers put weather as
variable for state of nature; then a number of expected input will decide number of seed
when weather is good/bad.
 In a all commodity-option economy (Critical Ideal Condition) : producers know the exact
output under uncertainty; revenue is determined for maximizing profits.
 In a non-ideal condition : producers decide inputs; outputs are determined by input & state
of nature; Prices are set and those that will prevail is affected by state of nature. Any
unwillingness to take risks will give rise to a nonoptimal allocation of resources
 Presence of insurance can shift risk and also makes it possible to have an optimal allocation
of resources. However, insuranceisalso limited. Therefore, a co-insuranceis looked as the
solution for compromising between allocation of risk-taking action and incentive effects
 Another way to shift risk is cost-plus contract where a combination of fixed-price contract
and insurance against cost is applied
 Who should bear the risk? If risks are high , no firms will allocate their resources to
invention. To solve this ; co-insurance and cost-plus contract can be considered.
 Under uncertainty, informationwillbe regarded havingeconomic value. Thosewho acquire
it can respond better to market demand.
 Information is a commodity with a peculiar characteristic
 Incentive to invest can exist. This incentive brings profit to the inventor and also market in
general
 Incentive to invest is less under monopolistic than under competitive condition because in
monopolistic condition, appropriability will be greater.


4. What is the issue
 Little discussion regarding allocation of resources under uncertain condition
 Does incentive to invest differs in monopoly & competitive economy?
Key Results
∙ A free enterprise economy to underinvest in invention and research because of high-risk,
product only appropriate for a limited time and increasing returns in use
∙ In order to reachoptimalallocationof resource in invention, it’simportantthatgovernment
is not ruled by profit-loss criteria
Main Implications and contributions
 This article explore the effect on allocation for resource in invention can lead to a more
welfare economy
Critics & Extension Points
Arrows look into invention as a production of knowledge in which he explores problems in
different market type : monopolistic and competitive .It is more likely to extend his research into
patent-relatedissue. Whether a patentwillincreaselikelinesstoinventionor theother wayaround.
Whether a patent will be less in monopoly or competitive market

5. Romer, Paul M., "Endogenous Technological Change," Journal of Political Economy,
1990, 98 (5, Part 2--Supplement): S71-S102.
Key Research Question and Main Finding
How human capital determines the rate of growth by proposing a model of growth
Main Discussion
What has been done
 Through her proposed model, she shows that Human Capital is affecting Growth of
economy
What is the issue
 Too little human capital is devoted to research
 Large population is not sufficient to generate growth
Key research questions (Hypothesis)
 Fixed cost is affecting increase in profit of the market growth
 A higher market size will lead to growth of income level, welfare and rate of growth
 Population is not the right measurement for market size
 The presence of large domestic market in high populated countries is not a substitute
for trade
∙ Method (Data, Methodology)
∙ Data
Romer explores previous models of growth and analyze why variables are not suitable
anymore.
∙ (Econometric) Model can be seen on page S92
∙ Key Results
∙ Human Capital will define a faster growth of economy
∙ Free international trade is an option to countries who want to speed up growth
∙ Developed economies in today’s era permited rates of growth of income per capita
∙ Low levels of human capital help to explain why growth is not observed in underdeveloped
economies

6. ∙ If there’s no technological change means no growth
Main Implications and contributions
- Her Model made it possible to determine growth rate from parameters such as human
capital, labor and technological change.
- Decision to participate in trade will be important for a country that has large population
- However, population is not the most important factor, But Human capital is.
Limitations
- it does not differentiate between growth in developing and developed countries
Critics & Extension Points
- It’s interesting for me to read this article despite the calculation that Ibarely understand.
- This paper shows us that human capital is important for economic growth and by means
of human capital is knowledge, habit, personality and creativity.
- Extension point for this paper is to explore factors from different perspective such as
developing countries human capital and also policy side.