Estimating dynamic R&D choice: An analysis of costs and long-run benefits

Hosted by Knox Lovell

German manufacturing data is used to estimate a dynamic, structural model of discrete firm investment in R&D and quantify its cost and long-run benefit. The dynamic model incorporates linkages between the firm's R&D choice, product and process innovations, and future productivity and profits. The long-run payoff to R&D is measured as the difference in expected firm value generated by the R&D investment. It increases firm value by approximately 3.0 percent in high-tech manufacturing industries but only 0.2 percent in low-tech industries. Simulations show that R&D cost subsidies significantly affect investment rates and productivity changes in the high-tech industries.