KTH/CESIS Working Paper Series in Economics and Institutions of Innovation
Persistence of profits and the systematic search for knowledge - R&D links to firm above-norm profits
() and Daniel Wiberg
Abstract: Economic theory tells us that abnormal firm and industry
profits will not persist for any significant length of time. Any firm or
industry making profits in excess of the normal rate of return will attract
entrants and this competitive process will erode profits. However, a
substantial amount of research has found evidence of persistent profits
above the norm. Barriers to entry and exit, is an often put forward
explanation to this anomaly. In the absence of, or with low barriers to
entry and exit, this reasoning provides little help in explaining why these
above-norm profits arise and persist. In this paper we explore the links
between the systematic search for knowledge and the persistence of profits.
By investing in research and development firms may succeed in creating
products or services that are preferred by the market and/or find a more
cost efficient method of production. Corporations that systematically
invest in research and development may, by doing this, offset the erosion
of profits and thereby have persistently high profits which diverge from
the competitive return.We argue that even in the absence of significant
barriers to entry and exit profits may persist. This can be accredited to a
systematic search for knowledge through research and development.
Keywords: Persistence of Profits; Profit Dynamics; R&D; Innovation Activity; Knowledge; (follow links to similar papers)
JEL-Codes: C10; C32; O10; O32; (follow links to similar papers)
17 pages, March 13, 2007
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