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Advertising, in-house R&D, and growth

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  • Volker Grossmann

Abstract

This paper develops a quality-ladder model of endogenous growth to study the interplay between in-house R&D and combative advertising expenditure, and its implications for economic growth, firm size, and welfare. The analysis shows that, somewhat surprisingly, higher incentives to engage in advertising, although combative, unambiguously foster innovation activity of firms. This, possibly, leads to faster growth and even higher welfare. These results rest on two features of the model which are well-supported by empirical evidence. First, if firms incur higher sunk costs for marketing, concentration and firm size rise. Second, firm size and R&D expenditure are positively related as larger firms are able to spread R&D costs over higher sales. The analysis also suggests that R&D subsidies are conducive to R&D and growth without inducing firms to raise advertising outlays. Copyright 2008 , Oxford University Press.

Suggested Citation

  • Volker Grossmann, 2008. "Advertising, in-house R&D, and growth," Oxford Economic Papers, Oxford University Press, vol. 60(1), pages 168-191, January.
    • Handle: RePEc:oup:oxecpp:v:60:y:2008:i:1:p:168-191
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    File URL: http://hdl.handle.net/10.1093/oep/gpm016
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    Cited by:

    1. Benedetto Molinari & Francesco Turino, 2009. "Advertising, Labor Supply and the Aggregate Economy. A long run Analysis," Working Papers 09.16, Universidad Pablo de Olavide, Department of Economics.
    2. Wang, Wenya & Yang, Ei, 2023. "Multi-product firms and misallocation," Journal of Development Economics, Elsevier, vol. 163(C).
    3. Grossmann, Volker, 2008. "Entrepreneurial Innovation and Sustained Long-Run Growth without Weak or Strong Scale Effects," IZA Discussion Papers 3389, Institute of Labor Economics (IZA).
    4. Josef Falkinger, 2008. "Limited Attention as a Scarce Resource in Information-Rich Economies," Economic Journal, Royal Economic Society, vol. 118(532), pages 1596-1620, October.
    5. Philippe Askenazy & Thomas Breda & Delphine Irac, 2016. "Advertising and R&D: theory and evidence from France," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 25(1), pages 33-56, January.
    6. Laurent Cavenaile & Pau Roldan-Blanco, 2021. "Advertising, Innovation, and Economic Growth," American Economic Journal: Macroeconomics, American Economic Association, vol. 13(3), pages 251-303, July.
    7. Turino Francesco, 2010. "Non-Price Competition, Real Rigidities and Inflation Dynamics," The B.E. Journal of Macroeconomics, De Gruyter, vol. 10(1), pages 1-61, July.
    8. Benedetto Molinari & Francesco Turino, 2018. "Advertising and Aggregate Consumption: A Bayesian DSGE Assessment," Economic Journal, Royal Economic Society, vol. 128(613), pages 2106-2130, August.
    9. Michael Klein & Fuat Sener, 2023. "Product Innovation, Diffusion and Endogenous Growth," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 48, pages 178-201, April.
    10. Cheng, Louis T.W. & Chan, Ricky Y.K. & Leung, T.Y., 2018. "Impact of perk expenditures and marketing expenditures on corporate performance in China: The moderating role of political connections," Journal of Business Research, Elsevier, vol. 86(C), pages 83-95.
    11. Grossmann, Volker, 2009. "Entrepreneurial innovation and economic growth," Journal of Macroeconomics, Elsevier, vol. 31(4), pages 602-613, December.
    12. Michael Klein & Fuat Sener, 2023. "Product Innovation, Diffusion and Endogenous Growth," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 48, pages 178-201, April.
    13. A. Arrighetti & A. Ninni, 2009. "Firm size and growth opportunities: a survey," Economics Department Working Papers 2009-EP05, Department of Economics, Parma University (Italy).

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