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Knowledge, growth without scale effects, and the product life cycle

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  1. Introduction
  2. Growth and scale effects
    1. Knowledge and scale effects in growth
    2. Empirical evidence
    3. Models of growth without scale effects
  3. Knowledge, R and D and spillovers at the firm
    1. Firm size and growth
    2. R and D and pure knowledge spillovers
    3. Knowledge, R and D, spillovers, increasing returns, and the firm
    4. Diversification and firm performance
  4. Growth without scale effects and structural change
    1. A simple model
    2. Growth, income, and demand
    3. Structural change and deindustrialization
    4. Discussion and conclusions
  5. Measurement issues in the study of R and D based growth
    1. TPF and the knowledge stock
    2. Output, growth, the CPI, and well being
    3. Discussion and conclusions
  6. The product life cycle, demand
    1. The life cycle
    2. Demand and growth without scale effects
    3. Discussion and conclusions
  7. Concluding remarks
  8. References

For several reasons, knowledge cannot be treated like any other commodity. One of these reasons is the nonrivalrous nature of knowledge, which means that one person's use of certain knowledge does not diminish another person's use of the same knowledge (at the same time). This important property of knowledge is used in several early models of R&D-based growth1,

e.g. Romer (1990), Grossman and Helpman (1991), and Aghion and Howitt (1992). In these models this property leads to a scale effect, which boils down to larger economies growing faster than smaller economies (with the measure of size suitably defined (cf. Backus, Kehoe and Kehoe 1992)).
In an influential paper, Jones (1995a) pointed out that growth with scale effects, as predicted

by the early models of R&D-based growth, is inconsistent with empirical facts. Over the last

40 years the OECD countries have experienced a tremendous rise in the number of people involved in R&D activities whereas the growth rates of per-capita income have shown no corresponding increase. This is a puzzling observation and has led to new models of R&D- based growth that did not incorporate scale effects e.g. Jones (1995b), Smulders and van de Klundert (1995), Young (1998), Li (2000), and Peretto and Smulders (2002).
Generally, however, these models suffer from the ?Solow critique'; Solow (1994) criticizes

(some) growth theorists because they ?? often just insert favorable assumptions in an unearned way; and then when they put in their thumb and pull out the vary plum they have inserted, there is a tendency to think that something has been proved.? (p. 53). In the models
of growth without scale effects the prediction of a scale effects in growth of the early models

of R&D-based growth is removed by limiting the extent of the spillovers associated with knowledge's nonrivalrousness, but often the much-needed (micro-)economic foundation for
the crucial assumption in these models regarding the extent of knowledge spillovers - and the

mechanism limiting their extent - is lacking. Assuming that knowledge is rivalrous (not nonrivalrous) to limit spillovers and dispose of the scale effects prediction of the early models
of R&D-based growth simply does not shed much light on the issue of growth without scale effects however.

provide background information regarding, amongst others, work discussed in the main text, data used in figures, etc.

[...] The standard R&D-based models of growth (with or without scale effects) do allow for the creation of new products (and the destruction of old ones), but in these models the product life cycle is determined by the life cycle of the corresponding production technology. In the model developed by Aoki and Yoshikawa technological progress comes in the form of new products (or sectors) and has its impact on the growth rate of the aggregate through the creation of demand. While technological progress in the standard R&D-based models of growth comes in the form of an increase in total factor productivity or an outward shift of the production frontier, the growth effect of demand-creating innovation is not well captured by either of these interpretations of growth. [...]

[...] (1996), ?Entry, Exit, Growth and Innovation over the Product Cycle', American Economic Review 562-83. Klepper, S., and E. Graddy (1990), evolution of new industries and the determinants of market structure', RAND Journal of Economics 27-44. Klette, T.J. (1996), scope economies and plant performance', RAND Journal of Economics 502-22. Kongsamut, P., S. Rebelo, and D. Xie (2001), ?Beyond Balanced Growth', Review of Economic Studies 869-82. Kortum, S. (1997), ?Research, Patenting and Technological Change', Econometrica 1389-1419. Kremer, M. (1993), ?Population growth and technological change: one million B.C. [...]

[...] This is because using input-output relations makes the assumption that spillovers are somehow associated with the flow of goods and/or services between industries and in the framework thus created, the contribution to productivity growth is attributed to industries in a manner that has much similarities to the way in which prices can (and should) be corrected for quality increases The second type of weighting scheme tries to correct for the actual usefulness of industry i's R&D (capital) for industry j by taking into account the technological distance between the two industries (see Griliches 1979). [...]

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