The Baumol Model Of Innovation Based Expansion Economics Essay

The main idea behind Baumol's model is the fact Invention is the motivating force behind the expansion magic of capitalism. Inside the neoclassical theory of the organization, firms compete predicated on price, but Baumol argues that in a Capitalist market innovation rather than price is the main competitive sizing and less progressive firms will find their market segments shrinking as they lose business to their more innovative rivals. Thus, innovation is essential to the success of businesses in a capitalist market (Holcombe, 2004).

Baumol argues that innovation has changed price as the main factor that is behind economic growth. He suggests that though it has been regarded that important innovations stem from small businesses, individuals or enterprisers, the bulk of innovative activity however is carried out by large oligopolistic organizations. Baumol's argument facilitates Schumpeter's variation between enterprisers led and routinized innovation. Schumpeter organised that technical competition was the proper execution of competition for all sorts of firms but Baumol argues that it is mainly large oligopolistic organizations that take part in this kind of competition and regarding to Fagerberg (2004), this clarifies why in his examination Baumol centers mainly on oligopolistic organizations.


While acknowledging price competition, Baumol stresses that large organizations use invention as the most crucial weapon for competition. He further explains that firms do not intend to associated risk too much advancement as it is expensive and can be produced obsolete by rival companies. Therefore, organisations have to separate the dissimilarities through the sales of technology licenses and contribution in technology sharing compact that pay huge dividend to the overall economy as a whole which makes innovation a routine feature of financial life.

Baumol suggests that there are five important pre-conditions for the lifestyle of the free market economy which are oligopolistic competition this means competition among large firms where invention is the primary weapon, routinization of technology activities which makes them an ordinary component of the activities of a firm thereby lowering the doubt of the procedure. Beneficial entrepreneurship which is bonuses for business owners to devote themselves to successful development rather than ground breaking hire seeking, the rule of law includes carrying out contracts and safeguarding contracts from illogical expropriation that is, property rights, royalties and copyright and technology offering and trading which is merely the way firms pursue opportunities for profitable dissemination of technology (Baumol, 2002).

These pre conditions are the top features of the free market economy. In other economies, they might are present in weaker forms and sometimes not are present in any way. Baumol argues these features are important for describing the growth achievements of the free market.


Baumol targets the partnership between independent entrepreneurs who are the primary source of innovative breakthroughs in the marketplace and hi-tech corporations with the routinized research and development activities whose most important accomplishment has been the regular improvement of the innovative products and procedures contributed by independent internet marketers and the huge increase in the capacity of those products and processes. Matching Sheshinski, (2007), the emphasis in this examination is on the critical role of the businessman.

Oligopolistic Competition identifies competition among large businesses where innovation is the excellent weapon, ensuring extended innovative activities and their development. In this example a few large businesses dominate a specific market. However, it could be argued that a theory of invention based growth needs to consider the different types of companies that exist, their mutual connection and the selection processes allowing some businesses to grow while others may have no choice but out of business.

Routinization of Development: Invention is one of the mechanisms of financial growth. It can be explained by repertoires and actions, the profit earning mechanism drives businesses toward routinization of the creativity process, and it in turn will limit the producing income. Thus, routinization is one major means by which firms reduce the risks experienced in their invention rivalry. A considerable degree of routinization is currently standard in a wide variety of firms including telecommunications, computer manufacturing and pharmaceuticals.

Technology Selling and Trading regarding to Baumol identifies a firm's intentional pursuit of opportunities for profitable spreading of enhancements and leasing of the to utilize them that is, equilibrium between protection and diffusion and also equilibrium between first and second mover advantages. First movers have two prospects, sell new products and the technology to develop services, for second movers there is absolutely no incentive to take as he's buying technology from first movers. That is very important as it reduces the problem of spillovers which tend to impede the release of improvements whose social benefits unlike private earnings exceed their cost. However, Paul David in his theory of course dependence says that the first mover advantages subject a great deal but second mover is not as important as many people are locked-in to first movers even on the onset of new technologies and this is not consistent with the Baumol model.

Baumol also talks about the realities of the average person players in capitalism most of all, the interplay between the small independent business owner innovators and the top established firms.

Another facet of Baumol's model is how risk and doubt is being cared for. Uncertainty is an important aspect of technology in the sense that generally you never know what the outcome will be, corresponding to Baumol, technology that presents real uncertainty is designed for small organizations as large oligopolistic firms, he argues, take part in more usual type invention, which is more predictable but matching to Fagerberg (2004) he does not provide enough information to aid this.

Also, Baumol recognizes development as demand influenced to minimize cost of development and create products to meet up with the market demand with the aim of maximizing earnings, however, Mowery and Rosenberg see innovation as demand powered, driven by regimens but also source constrained that is, by the supply of knowledge and you have to purchase prepositional knowledge as they are connected together which could lead to highly routinized process.

Baumol also looks at creativity from micro level and how it is driven by the actual fact that celebrities can compete in the market.

Baumol also asserts that if all benefits were captured by innovators, then your work force would be entirely "condemned to extremely low dietary and educational levels. " However, the debate overlooks the actual fact that with given source of information endowments, innovation increases the quantity of social product designed for distribution and hence by Say's Laws aggregate demands (Scherer, 2002),


In all, Baumol's model is really original and it centers around the free market technology being the main driver of monetary development in a capitalist current economic climate, although, he didn't really define competition nor have he address factor of purchase cost. His work could also be criticized as he focused on large oligopolistic firms and not small firms

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