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R&D, Investment, and Industry Dynamics

  • Saul Lach
  • Rafael Rob

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. Copyright 1996 The Massachusetts Institute of Technology.

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Article provided by Wiley Blackwell in its journal Journal of Economics & Management Strategy.

Volume (Year): 5 (1996)
Issue (Month): 2 (06)
Pages: 217-249

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Handle: RePEc:bla:jemstr:v:5:y:1996:i:2:p:217-249
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  1. Bronwyn Hall & Fumio Hayashi, 1989. "Research and Development As An Investment," NBER Working Papers 2973, National Bureau of Economic Research, Inc.
  2. Roger H. Gordon & Mark Schankerman & Richard H. Spady, 1987. "Estimating the Effects of R&D on Bell System Productivity: A Model of Embodied Technical Change," NBER Working Papers 1607, National Bureau of Economic Research, Inc.
  3. Reinganum, Jennifer F, 1983. "Uncertain Innovation and the Persistence of Monopoly," American Economic Review, American Economic Association, vol. 73(4), pages 741-48, September.
  4. Loury, Glenn C, 1979. "Market Structure and Innovation," The Quarterly Journal of Economics, MIT Press, vol. 93(3), pages 395-410, August.
  5. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth through Creative Destruction," Econometrica, Econometric Society, vol. 60(2), pages 323-51, March.
  6. Harris, Christopher & Vickers, John, 1985. "Perfect Equilibrium in a Model of a Race," Review of Economic Studies, Wiley Blackwell, vol. 52(2), pages 193-209, April.
  7. Dixit, Avinash, 1979. "The Role of Investment in Entry-Deterrence," The Warwick Economics Research Paper Series (TWERPS) 140, University of Warwick, Department of Economics.
  8. Gilbert, Richard J & Newbery, David M G, 1982. "Preemptive Patenting and the Persistence of Monopoly," American Economic Review, American Economic Association, vol. 72(3), pages 514-26, June.
  9. Gort, Michael & Klepper, Steven, 1982. "Time Paths in the Diffusion of Product Innovations," Economic Journal, Royal Economic Society, vol. 92(367), pages 630-53, September.
  10. Ernst R. Berndt & Zvi Griliches, 1993. "Price Indexes for Microcomputers: An Exploratory Study," NBER Chapters, in: Price Measurements and Their Uses, pages 63-100 National Bureau of Economic Research, Inc.
  11. Kenneth Arrow, 1962. "Economic Welfare and the Allocation of Resources for Invention," NBER Chapters, in: The Rate and Direction of Inventive Activity: Economic and Social Factors, pages 609-626 National Bureau of Economic Research, Inc.
  12. Reinganum, Jennifer F, 1984. "Practical Implications of Game Theoretic Models of R&D," American Economic Review, American Economic Association, vol. 74(2), pages 61-66, May.
  13. Richard Ericson & Ariel Pakes, 1992. "An Alternative Theory of Firm and Industry Dynamics," Cowles Foundation Discussion Papers 1041, Cowles Foundation for Research in Economics, Yale University.
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