Featured Article Empirical Modeling of R&D Demand in a Dynamic Framework

Abstract Empirical analysis of firm-level investment in research and develop-ment (R&D) and its effect on innovation patterns and productivity has advanced as a result of innovation surveys in many countries. The weak link in the analysis of these surveys is the empirical model of firm R&D choice. In this paper we sum-marize how a dynamic, structural model of firm investment can be used to esti-mate firm demand for R&D with the data collected in innovation surveys. The estimates provide a natural measure of the expected benefit to the firm of investing in R&D. They also allow the researcher to simulate how the firm’s R&D invest-ment will respond to factors that shift cost or demand such as a policy change designed to subsidize R&D expenditures or provide financial support to firms with less favorable access to capital markets