Essays on R&D, innovation and economic growth

My dissertation consists of three essays. The first essay proposes a theory on the dynamics of productivity dispersion. In response to a negative profit shock, the leading firm responds by increasing R&D effort to recover the lost profit, while the laggard firm responds by reducing R&D effort because a lowered profit means a smaller return to innovation. Such heterogeneous R&D responses explain the observed countercyclical productivity dispersion. The second essay engages in an empirical study confirming the theory in the previous essay. Parametric and semi-parametric reduced-form regressions both exhibit heterogeneous responses in firms’ R&D intensity to the negative profit shock as suggested by my theory. A structural estimation of the model using GMM and data from U.S. manufacturing firms produces the heterogeneous R&D responses and the consequential larger productivity dispersion in response to a negative profit shock. The structurally estimated model also shows a higher productivity growth rate following the shock, which is due to the higher R&D effort exerted by the leading firm. The third essay focuses on the firm decision between R&D projects different in quality and time structure. With a theoretical model, I show that a temporary protectionist policy leads a positive measure of domestic firms to switch from the long-term to the short-term innovation project. It is because the policy raises the profitability of innovation in the short term, and some firms sacrifice quality for the timeliness of innovation as a response, resulting in a lower productivity growth rate. The above theory on firms’ decisions regarding R&D projects is motivated and verified by my empirical study of the 1986 U.S.-Japan semiconductor trade conflict