Abstract The
focus of this paper is an econometric
analysis of the determinants of private
firms'' R&D activities in the context of a
general dynamic factor demand model. Besides
the traditional production factors we treat
technological knowledge, endogenously
determined by R&D expenditures, as a further
input factor. While labour and materials are
assumed to be variable, capital and know-how
are considered as quasi-fixed. The dynamic
demand equations for labour, capital
investment and R&D which are derived from an
intertemporal cost minimisation are
estimated for a panel data set of small and
medium size German firms. The data covers
the period between 1978 and 1982 and
includes 408 firms. It turns out that R&D
activity depends on the underlying
production structure as suggested by
neoclassical theory. In addition, by
introducing firm specific effects, we can
show that firm size and market concentration
influence innovative behaviour in accordance
with the Schumpeterian hypotheses.
Paper presented at the
Industrial Organization Conference at the
Annual Meeting of the Austrian Economic
Association, Vienna, June 24–26, 1992, the
7th Annual Congress of the European Economic
Association, Dublin, August 29–31, 1992, and
the 19th Annual Conference of the EARIE,
Stuttgart, September 4–6, 1992. Helpful
suggestions and comments were received from
participants of these conferences as well as
from seminar participants at Temple
University, at the University of Augsburg,
and at the fourth DFG workshop
 Marktstruktur
und gesamtwirtschaftliche Entwicklung
in Munich. We are particularly indebted to
an anonymous referee for very helpful
specific comments. Finally, we would like to
thank Horst Albach for providing us with the
panel data set. Financial support of the DFG
is gratefully acknowledged.
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