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This paper analyzes the implications of advertising for firm dynamics and economic growth in the long run through its interaction with R&D investment at the firm level.
, the share of R&D expenditures over GDP fluctuated between 2.27% and 2.82%.2 Over the same time period, firms in the U.S. spent on average around 2.2% of GDP on advertising each year.3 Yet, the growth literature is relatively silent on the potential interaction between R&D and advertising expenditures and its potential impact on firm growth, firm dynamics and long run economic development.
In this paper, we ask how advertising affects R&D investment decision at the firm level and study the implications for welfare, growth and firm dynamics.
We also find that the interaction between R&D and advertising can generate some observed empirical regularities related to firm dynamics, such as decreasing firm growth rates with firm size (a deviation from the so-called Gibrat's law) as well as the decreasing R&D intensity with firm size.
In par- ticular, our model is calibrated to match four empirical facts related to firm dynamics and investment across firm size.
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