INDUSTRY EVOLUTION AND RESEARCH-AND-DEVELOPMENT EXTERNALITIES

R&D externalities can imply ranges of aggregate increasing returns to scale in R&D, As a consequence several equilibria can exist involving different numbers of firms and different R&D investment levels. In a t heoretical model the equilibrium dynamics are analyzed, showing that c yclical fluctuations of the number of firms and R&D investment may be expected, and that the long-run equilibrium is highly sensitive to inv estors' initial beliefs. The model is tested empirically using a uniqu e database comprising competing firms in various R&D races.