Estimating Dynamic R&D Choice: An Analysis of Costs and Long-Run Benets

This paper estimates a dynamic structural model of discrete R&D investment and quanti…es its cost and long-run bene…t for German manufacturing …rms. The dynamic model incorporates linkages between the …rm’s R&D choice, product and process innovations, and future productivity and pro…ts. The long-run payo¤ to R&D is measured as the proportional di¤erence in expected …rm value generated by the R&D investment. It increases …rm value by 6.7 percent for the median …rm in high-tech manufacturing industries but only 2.8 percent in low-tech industries. Simulations show that reductions in maintence costs of innovation signi…cantly raise investment rates and productivity while reductions in startup costs have little e¤ect. We are grateful to Uli Doraszelski, Jordi Jaumandreu, Ken Judd, Florin Maican, Jacques Mairesse, Matilda Orth, Joris Pinkse, Marc Rysman, Spiro Stefanou, Jim Tybout, Daniel Xu, Hongsong Zhang and three referees for helpful comments and discussions. We thank the Center for European Economic Research (ZEW) for providing data access and research support. Contact information: Peters ([email protected]), Roberts ([email protected]), Vuong ([email protected]), Fryges ([email protected])