R&D and absorptive capacity: from theory to data

This paper presents a unified model that integrates the theoretical literatue on Schumpeterian endogenous growth, the microeconometric literature on R&D and productivity, and the empirical literature on productivity convergence. Starting from a structural model of endogenous growth following Aghion and Howitt (1992, 1998), we provide microeconomic foundations for a reduced-form equation for Total Factor Productivity (TFP) growth that is commonly used in the empirical literature. We allow a role for R&D in innovation and technology transfer (absorptive capacity). The analysis suggests that many existing studies underestimate R&D's social rate of return and provides an explanation for long-run productivity levels at the industry level.