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Innovating Firms and Aggregate Innovation

Tor Jakob Klette and Samuel Kortum
Journal of Political Economy
Vol. 112, No. 5 (October 2004), pp. 986-1018
DOI: 10.1086/422563
Stable URL: http://www.jstor.org/stable/10.1086/422563
Page Count: 33
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Innovating Firms and Aggregate Innovation
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Abstract

We develop a parsimonious model of innovation to confront firm‐level evidence. It captures the dynamics of individual heterogeneous firms, describes the behavior of an industry with firm 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 of firms’ R&D investment, the concentration of R&D among incumbents, the link between R&D and patenting, and why R&D as a fraction of revenues is positively correlated with firm productivity but not with firm size or growth.

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