Industrial Research and Development Expenditures: Determinants, Prospects, and Relation to Size of Firm and Inventive Output

1 A preliminary version of this paper was read at the December, 1961, meetings of the Econometric Society. The paper, which is part of a larger project on industrial research and technical change, was finished while I was visiting professor of economics at Harvard University, the work being supported by a grant from the National Science Foundation. It was begun at Carnegie Institute of Technology and was supported by a contract from the Office of Economic and Statistical Studies of the National Science Foundation, by a Ford Foundation Faculty Research Fellowship, and by the Cowles Foundation for Research in Economics at Yale University. The paper, which will be reprinted as a Cowles Foundation Paper, benefited from discussions with W. Brainard, A. Heston, J. Hooper, and E. Phelps. My thanks also go to C. Phillips and J. Zoler for assistance, to the companies for data and interviews, and to Professors I. Horowitz, A. Ninian, A. Rubenstein, and J. Schmookler for making unpublished data available to me. its present rate during the sixties? How are a firm's R & D expenditures related to its size? What is the relationship between a firm's R & D expenditures and the number of significant inventions, or innovations, that it carries out? My purpose in this paper is to construct and test some simple models designed to help answer these questions. Attention is confined to privately financed R & D, which currently represents an investment of about $5 billion and which constitutes most of the R & D carried out by industries other than aircraft, electrical equipment, and instruments.2 An analysis of government-financed R & D, which is dictated largely by military considerations and the results of which are often classified, will appear elsewhere.3