DP3248 Innovating Firms and Aggregate Innovation

Author(s): Tor Jakob Klette , Samuel S Kortum

Publication Date: March 2002

Keyword(s): r&d , firm growth , productivity , market structure , endogenous growth theory , birth and death processes

JEL(s): L11 , O31

Programme Areas: Industrial Organization

Link to this Page: www.cepr.org/pubs/dps/DP3248.asp

We develop a parsimonious model of innovating firms rich enough to confront firm-level evidence. It captures the dynamic behaviour of individual heterogeneous firms, describes the evolution of an industry with simultaneous entry and exit, and delivers a general equilibrium model of technological change. While unifying the theoretical analysis of firms, industries and the aggregate economy, the model yields insights into empirical work on innovating firms. It accounts for the persistence over time of firms' R&D investment, the concentration of R&D among incumbent firms, and the link between R&D and patenting. Furthermore, it explains why R&D as a fraction of revenues is strongly related to firm productivity yet largely unrelated to firm size or growth.