Firm heterogeneity, R&D, and economic growth

In this paper, we establish a link between firm heterogeneity and long-run economic growth both theoretically and empirically. We show that firms' technological heterogeneity creates the diversification effect for R&D financiers, facilitating R&D investment, and thus leading to long-run economic growth. This result holds even when heterogeneity limits the possibility of a synergy effect between firms with similar technologies. In testing the model's prediction using U.S. firm-level data, we define industries with higher firm-specific or idiosyncratic stock return volatility as those exhibiting higher firm-level technological heterogeneity and find a positive link between this measure and R&D intensity. Our paper implies that an economic growth policy aimed at increasing the diversity of the corporate sector may be more effective in attracting private R&D investments than the one aimed at concentration of resources on homogeneous projects due to the foregone diversification benefit of the latter.