Final answer:
The purpose of R&D investment in the shakeout phase is to enhance a company's competitive edge and foster innovation, which can lead to positive externalities such as spillover benefits to society. Government incentives to private firms for R&D can exploit private sector efficiencies and the broader social benefits outweigh the private gains.
Step-by-step explanation:
The purpose of R&D investment in the shakeout phase is crucial for firms to stay competitive, enhance their technology, and thus boost production. Research and development (R&D) investments can not only improve a firm’s own products and processes but can also generate broader economic benefits, such as positive externalities, which are benefits enjoyed by other firms and society as a whole.
For instance, when a company like Big Drug Company invests in R&D, it can lead to the discovery of a new drug that benefits the entire society, beyond the firm's own financial gains. These societal benefits can justify the provision of government incentives to private firms to encourage R&D investment, considering that the social rate of return can exceed the private rate of return.
Moreover, the government may prefer incentivizing private R&D over conducting the research itself due to potential efficiencies in the private sector, such as specialization, innovation agility, and cost-effectiveness. Therefore, R&D investment during the shakeout phase is a strategic maneuver to not only elevate the company’s market standing but also contribute to overall technological advancements and economic growth.