This project proposes a causal relationship between investments in knowledge (i.e., R&D expenditures) and in physical capital (i.e., machinery and equipment). The basic idea is that a successful completion of R&D projects, i.e., innovations, necessitates physical investments which embody the new ideas. Only then can the innovator generate a flow of profits from the new idea. This will be embedded in an industry equilibrium framework, suggesting that the evolution of industry (in terms of prices, quantities, entry and exit, R&D expenditures, etc.) can be explained via the mechanics of R&D innovations implementations. In particular, one can explain why R&D expenditures cause (in a statistical sense) physical investments, and why they are less volatile.
