Growth Through Inter-sectoral Knowledge Linkages

The majority of innovations are developed by multi-sector firms. The knowledge needed
to invent new products is more easily adapted from some sectors than from others. We
study this network of knowledge linkages between sectors and its impact on firm innovation
and aggregate growth. We first document a set of sectoral-level and firm-level observations
on knowledge applicability and firms’ multi-sector patenting behavior. We then develop
a general equilibrium model of firm innovation in which inter-sectoral knowledge linkages
determine the set of sectors a firm chooses to innovate in and how much R&D to invest in
each sector. It captures how firms evolve in the technology space, accounts for cross-sector
differences in R&D intensity, and describes an aggregate model of technological change. The
model matches new observations as demonstrated by simulation. It also yields new insights
regarding the mechanism through which sectoral fixed costs of R&D affect growth.

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