Advertising, in-house R&D, and growth

Author: Grossmann, Volker

Source: Oxford Economic Papers, Volume 60, Number 1, January 2008 , pp. 168-191(24)

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Abstract:

This paper develops a quality-ladder model of endogenous growth to study the interplay between in-house R&D and combative advertising expenditure, and its implications for economic growth, firm size, and welfare. The analysis shows that, somewhat surprisingly, higher incentives to engage in advertising, although combative, unambiguously foster innovation activity of firms. This, possibly, leads to faster growth and even higher welfare. These results rest on two features of the model which are well-supported by empirical evidence. First, if firms incur higher sunk costs for marketing, concentration and firm size rise. Second, firm size and R&D expenditure are positively related as larger firms are able to spread R&D costs over higher sales. The analysis also suggests that R&D subsidies are conducive to R&D and growth without inducing firms to raise advertising outlays.

Keywords: O31; O40; L16

Document Type: Research article

DOI: http://dx.doi.org/10.1093/oep/gpm016

Publication date: 2008-01-01

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Oxford Economic Papers is a general economics journal, publishing refereed papers in economic theory, applied economics, econometrics, economic development, economic history, and the history of economic thought. It occasionally publishes survey articles in addition to original papers. Books are not reviewed, but substantial review articles are considered. The journal occasionally publishes survey articles in addition to original papers, and occasionally publishes special issues or symposia.