How do different firms respond to R&D incentives and, in turn, shape aggregate growth? We develop a novel empirical framework, grounded in endogenous growth theory, allowing us to measure firms’ responsiveness to R&D incentives and to aggregate such responses. After validating the predictions of our framework using several micro – datasets, we apply it to Compustat data. We find that (i) ignoring firm heterogeneity severely under-states the aggregate effectiveness of R&D incentives, (ii) per dollar spent on R&D incentives, young (rather than small) firms raise aggregate growth the most, and (iii) our results are robust to knowledge spillovers, dynamics, and borrowing constraints.
Authors Marek Ignaszak, Daniel Robbins and Petr Sedláček