cost reductions through learning by doing. The innovator’s lower cost may enable it to continue to profit even after imitators have entered the market. RESEARCH AND DEVELOPMENT EXPENDITURESAs it relates to businesses, the term “research and development” is used loosely to include direct efforts toward invention, innovation, and diffusion. However, government also engages in R&D, particularly that related to national defense. In 1995, total U.S. R&D expenditures (business plus government) were $179 billion. This amount was about 2.5 percent of U.S. GDP and is a reasonable measure of the emphasis an economy puts on technological advance.American manufacturers and businesses spent $132 billion on R&D in 1995. U.S. firms collectively channeled 74 percent of their R&D expenditures to “development” (innovation and imitation, the route to diffusion). They used another 21 percent for applied research, roughly equivalent to pursuing invention. Only 5 percent of business R&D expenditures went for basic research - the search for general scientific principles. Of course, different industries, and different firms within industries, vary greatly in the amounts of emphasis they place on these three processes. UNIVERSITY AND GOVERNMENT SCIENTIFIC RESEARCHOnly 5 percent of manufacturers and business R&D spending in the United States is for basic scientific research. This percentage is so small because scientific principles, as such, cannot be patented, nor do they usually have immediate commercial uses. Yet new scientific knowledge is highly important to technological advance. For that reason, entrepreneurs actively study the scientific output of university and government laboratories to find discoveries with commercial applicability. In fact, government and university labs have been fertile grounds for many technological breakthroughs, including hybrid seed corn, nuclear energy, satellite communications, the computer &...
