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RandD: investment and industry dynamics

Author: Lach, S ; Rob, RafaelINSEAD Area: Economics and Political Science Series: Working Paper ; 94/66/EPS Publisher: Fontainebleau : INSEAD, 1994.Language: EnglishDescription: 25 p.Type of document: INSEAD Working Paper Online Access: Click here 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 RandD 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 that differences in the object of accumulation. Our model stresses the causal relationship between past RandD 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 RandD expenditures
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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 RandD 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 that differences in the object of accumulation. Our model stresses the causal relationship between past RandD 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 RandD expenditures

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