A Structural Empirical Model of R&D Investment, Firm Heterogeneity, and Industry Evolution
This paper develops and estimates an industry equilibrium model of manufacturing plants in the Korean electric motor industry from 1991 to 1996. Plant-level decisions on R&D, physical capital investment, entry, and exit are integrated in a dynamic setting with knowledge spillovers. We use a simulated method of moments estimator and the novel approximation method of Weintraub, Benkard and Van Roy (2008) to estimate the R&D cost, magnitude of knowledge spillovers, adjustment costs of physical investment, and plant scrap value distribution. Knowledge spillovers are essential to explaining the firm-level productivity evolution and the equilibrium market configuration. A counterfactual experiment reveals that a 15% R&D subsidy maximizes industry output and is broadly consistent with a past policy initiative of the Korean government.
We would like to thank Nezih Guner, Mark Roberts, James Tybout, and Gustavo Ventura for their extensive comments. We are also grateful to two anonymous referees, Allan Collard-Wexler, Boyan Jovanovic, Kala Krishna, Isabelle Perrigne, Bee-Yan Roberts, Andres Rodriguez-Clare, Quang Vuong, Neil Wallace, and especially Gabriel Weintraub for helpful discussions and comments. All remaining errors are ours. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.