R&D, investment, and industry dynamics

Saul Lach*, Rafael Rob

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

32 Scopus citations

Abstract

We present a model of industry evolution where the dynamics are driven by a process of endogenous innovations followed by subsequent embodiments in physical capital. Traditionally, the only distinction between R&D and physical investment was one of labeling: the first process accumulates an intangible stock, knowledge, while the second accumulates physical capital. Both stocks affect output in a symmetric fashion. We argue that the story is not that simple, and that there is more to it than differences in the object of accumulation. Our model stresses the causal relationship between past R&D expenditures and current investments in machinery and equipment. This causality pattern, which is supported by the data, also explains the observed higher volatility of physical investment relative to that of R&D expenditures.

Original languageAmerican English
Pages (from-to)217-249
Number of pages33
JournalJournal of Economics and Management Strategy
Volume5
Issue number2
DOIs
StatePublished - 1996

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