Introduction

“A look at the facts will now show why present-day economists think that scientific and engineering progress has been quantitatively the single most important factor for growth in the advanced countries” (Samuelson, 1976, p. 738). As Samuelson asserted in his popular economics textbook, few economists would deny the important role technical progress plays in modern economic growth.

The question to be asked, then, is how this technical progress is generated. It may be due to experience or learning by doing, as Arrow (1962a) argued. Or it may be due to governmental expenditures on research and development. The largest input toward technical progress, however, is made by business firms that undertake it to improve production efficiency and reduce costs and/or to develop new products and expand sales. For example, Nelson, Peck, and Kalachek found that “industrial research and development probably accounts for significantly more than half of the total national effort to advance technological knowledge” (Nelson et al., 1967, p. 45). Furthermore, they found that “industrial R & D is concentrated in about 400 largest firms” (Nelson et al., 1967, p. 65). These facts suggest that it is business firms, especially a limited number of large firms, that play a major role in advancing and applying our technological knowledge.

The purpose of this chapter is to present a model of economic growth that takes this observation into account. We have already analyzed in section 3.5 the behavior of the firm that engages in research activity for the purpose of increasing labor productivity besides the production and marketing of goods.