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Oxford Economic Papers Advance Access originally published online on May 15, 2007
Oxford Economic Papers 2008 60(1):168-191; doi:10.1093/oep/gpm016
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© Oxford University Press 2007 All rights reserved

Advertising, in-house R&D, and growth

Volker Grossmann*

*University of Fribourg, Department of Economics, Bd. de Pérolles 90, CH-1700 Fribourg, Switzerland; CESifo, Munich; Institute for the Study of Labor (IZA), Bonn; e-mail: volker.grossmann@unifr.ch

JEL classifications:: O31, O40, L16


  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.


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