Innovations in product quality and production methods are a major source of long run growth in output per capita. During this period of globalization it is very important to understand how investment in research and development (R&D) leads to innovations. Many countries subsidize activities that are intended to make firms more competitive in the world market. Empirical answers to questions regarding R&D require one to quantify how demand changes in response to the introduction of new goods and how supply changes in response to innovations in production.
Until recently almost all research on these questions use data that aggregate over prices and quantities so the measure of output is plant-level revenue. Aggregating prices and quantities over products at the plant confounds the effects of demand and supply, undermining the conclusions that can be drawn from such data. More recent plant-level surveys include firm-level data on both the revenues and quantities of each product sold, in addition to data on inputs used in production and for product and process-related R&D. This research agenda will develop a methodology for estimating demand, output production and the production of innovations using these new and richer data sets.
Applying the methodology will yield estimates that can be used to answer some of the long-standing questions related to R&D. A leading question in this literature is whether firms are doing too little or too much R&D from society's perspective, as economic theory says that forces can work in both directions. Other important questions include how R&D "produces" innovations as a function of detailed input measurements, how spillovers of R&D knowledge impact growth, and whether past approaches to answering these questions with more aggregated data led to correct or mistaken inferences about the relationship between R&D and growth.
Broader Impacts: In an attempt to encourage firms to become more competitive in this age of globalization many countries, including the United States, subsidize R&D. By providing answers to the above questions, this research will shed new light on the most effective way to allocate these subsidies. The data also come from a period when European Union tariffs were falling, making it possible to explore how stiffening competition affects R&D decisions, and how these decisions affect product and process innovations and the competitiveness of domestic firms. The techniques will be programmed in Stata and made publicly available so researchers in other countries that collect similar data can directly apply the new methods.
