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In this article I present an alternative specification of knowledge production and derive a structural econometric model with some desirable properties. I provide a simple and less data-intensive framework for empirical studies of the relationship between firm performance and R&D. The main empirical findings are as follows: (i) R&D has a positive effect on performance, (ii) the appropriable part of knowledge capital depreciates at a rate of .2, (iii) there are significant spillover effects of R&D across lines of business within a firm, and (iv) there are significant spillovers in R&D across firms that belong to the same interlocking group of firms.
Tor Jakob Klette (Mon,) studied this question.