ESTIMATING DYNAMIC R&D DEMAND: AN ANALYSIS OF COSTS AND LONG-RUN BENEFITS

This article estimates a dynamic structural model of discrete Research and Development (R&D)investment and quantifies its cost and long-run benefit for German manufacturing firms. The model incorporates linkages between R&D choice, product and process innovations, and future productivity and profits. The long-run payoff to R&D is the proportional difference in expected firm value generated by the investment. It increases firm value by 6.7% for the median firm in high-tech industries but only 2.8% in low-tech industries. Simulations show that reductions in maintenance costs of innovation significantly raise investment rates and productivity, whereas reductions in startup costs have little effect.