Productivity Dynamics, R&D Investments, and Competitive Pressure

This paper proposes a dynamic structural model with endogenous productivity to evaluate the impact of R&D on productivity when firms decide how much to invest; this decision depends on the competitive pressure that they face. Using data from Sweden, this paper finds that open market policies and entrepreneurship policies complement R&D policies and are important drivers of the competitiveness of established firms. Conservative estimates suggest that the optimal investment is at least 0.7 to 2.5 times the actual R&D investment for a firm at the median of the productivity growth and 2 to 4 times for a more productive firm