Product Market Competition, R&D Effort and Economic Growth

Using an integrated model of purposive R&D activity and human capital accumulation, this paper analyses the joint impact that product market competition may exert on the sectoral distribution of skills and economic growth. In a framework where innovation takes place through an R&D technology combining with constant returns to scale human capital and the existing stock of disembodied knowledge and where individuals may increase their own level of skills without employing technological capital, we find that economic growth is solely driven by human capital accumulation and is independent of knowledge spillovers from innovative activity. Product market power always positively affects R&D effort, whereas its impact on growth can be either positive or lacking depending on the way the structure of the economy is modelled. Accordingly, the paper accounts for the empirical evidence of a rising amount of resources invested in R&D and a simultaneous approximate constancy of per capita growth in the U.S. and other major industrialised countries in the second half of the last century.