On the Reswitching Property of R&D

Existing theoretical models of research and development (R&D) treat R&D as a single economic activity. Once R&D terminates, the only way for the activity to resume is by assuming some exogenous changes in the basic parameters of the model, e.g., the distribution of technological advances. In contrast, this paper treats R&D as two unique but dependent economic activities. A sequential R&D search model is developed to establish three fundamental results. First, reswitching of R&D is endogenized. Success in development may bring research back as the next optimal choice of action. It is shown that the reswitching phenomenon of the dynamic process of R&D is a result of optimal decision making. Second, when the economic returns based on existing production technology are low compared to what is potentially feasible, the immediate returns to development are high. Thus development is preferable to research. As the level of economic returns increases due to development success, the likelihood of further development success diminishes. Research will then be a better choice relative to development. However, if development is very successful, research will not significantly improve the likelihood of future development success. In that event one might as well capitalize on existing knowledge and continue to develop until the technology field is economically exploited. Third, the choice of a discount rate for R&D will affect the overall decision of R&D vs. stopping. However, the effect on the decision to research or to develop remains to be determined.