This paper develops a model of the growth of corporate productivity which captures the effects of both long-run technological advancement and short-term fluctuations in demand due to the economic cycle. Technological change is captured through the 'experience effect', where an individual's productive potential is raised by the cumulative productive capacity of all the employees of the enterprise, and the 'innovation effect' whereby total investment in R&D generates productivity improvements. The extent to which technological opportunities are translated into productive potential is dependent upon parameters which reflect the corporate culture of the enterprise. Simulation exercises, in which the key parameters of the model are calibrated using actual data for a range of companies, show that the model can explain well the evolution of productivity and employment. The paper demonstrates the use of the model as a management tool in characterizing and analysing the implications of different firm strategies.
