Advertising affects firms’ innovation and sales, and long-run economic growth

The interaction between advertising and innovation incentives at the firm level can alter aggregate economic measures. When advertising costs decrease, firms reallocate resources away from R&D and towards advertising, hurting long-run economic growth. Laurent Cavenaile and Pau Roldan-Blanco write that understanding the relationship between R&D and advertising might help explain the success of industrial policies aimed at generating economic growth and raising living standards.

 
Spending on innovation is important for business success but also for the aggregate economy, as a source of improved living standards. It is therefore key to understand what affects investment in research and development (R&D) at the firm level and how it translates into innovation. Innovation can result in the improvement of the quality of a firm’s existing products (e.g., the successive innovations from Apple’s original iPhone into its latest version), but it can also allow a firm to enter a new product market and potentially displace existing producers (e.g., Nokia’s displacement from the mobile phone market by competing smartphones such as the iPhone). In turn, entering firms can either be start-ups or incumbent firms that are already active in other product markets. Understanding the role of these different types of innovation is key for explaining the life cycle of firms. In addition, it is also crucial for public policy design (for instance, the design of targeted R&D subsidies) to understand what type of firms are responsible for each type of R&D and innovation.

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Πηγή: blogs.lse.ac.uk