| Abstract: | This article estimates a dynamic structural model of discrete Research and Development (R&D) investment and quantifies its cost and long‐run benefit for German manufacturing firms. The model incorporates linkages between R&D choice, product and process innovations, and future productivity and profits. The long‐run payoff to R&D is the proportional difference in expected firm value generated by the investment. It increases firm value by 6.7% for the median firm in high‐tech industries but only 2.8% in low‐tech industries. Simulations show that reductions in maintenance costs of innovation significantly raise investment rates and productivity, whereas reductions in startup costs have little effect. |
