Working Paper: NBER ID: w4060
Authors: Saul Lach; Rafael Rob
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 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 R&D expenditures).
Keywords: R&D; investment; industry dynamics; causality
JEL Codes: O31; O32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Past R&D expenditures (O32) | Current investments in machinery and equipment (E22) |
| R&D expenditures (O32) | Physical investment volatility (G31) |
| Innovations from R&D (O32) | New investments in physical capital (E22) |
| R&D expenditures (O32) | Industry dynamics (L19) |
| Entry and exit in industries (L19) | Innovations arising from R&D (O39) |