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Duke Economics Working Paper #97-06

Technological Change, Market Rivalry, and the Evolution of the Capitalist Engine of Growth

Pietro F. Peretto

Abstract

In the early stage of western industrialization, innovation was the domain of individuals who devoted their entrepreneurial talents to the development of a new product or process, typically setting up a new firm in order to take the innovation to the market. Today, commercial R&D is almost exclusively carried out by corporate laboratories affiliated with manufacturing firms. The corporate R&D lab, however, did not exist in its modern form until the late 19th century. Some authors trace its birth in the US to 1876, when Thomas Edison opened his R&D lab in Menlo Park and Alexander Graham Bell established his facility in Boston. The history of western industrialization, thus, suggests that a fundamental change in the structure of incentives, and consequently in the nature and the organization of the R&D process, occurred around the turn of the century. Three questions arise. What is the nature of this change? What economic forces caused it? What are its implications? To answer these questions, I construct a model where this change is endogenous to the evolution of the economy towards industrial maturity. The change in the locus of innovation -- from R&D undertaken by inventors-entrepreneurs, to R&D undertaken within established firms in close proximity to the production line - results from the interaction of market structure and firm-based technological change. This interaction, this paper argues, captures the essence of the evolution of the capitalist engine of growth and provides an economic explanation of a "stylized fact" that has received no attention in the theoretical literature. The endogenous market structure generates dynamic feedbacks that shape the growth path of the economy and determine the structural change it undergoes, including the endogenous formation of corporate R&D labs. Entry and the evolution of market rivalry, thus, drive the change in the incentives faced by economic agents and thereby explains when and how established firms become the major locus of R&D activity.

Keywords: Industrialization, R&D, Technological Change, Long-run Growth, Entry, Market Structure.

JEL: E10, L16, O31, O40

Published in Journal of Economic Growth, Vol. 3, No. 1, March 1998, pp. 53-58.