Investment in knowledge‐based capital and productivity: Firm‐level evidence from a small open economy

This paper examines the responsiveness of firm productivity to investment in knowledge‐based capital (KBC) including a range of intangible assets such as research and development (R&D), intellectual property assets, computer software, organizational, and branding capital. A dynamic econometric model is estimated with micro‐data from Ireland over the period 2006–2012. Ceteris paribus, the estimated average elasticity of productivity with respect to investment in KBC per employee is 0.3. In comparison to previous empirical studies, this paper goes beyond the representative firm approach and accounts for the heterogeneous behavior of firms which differ by ownership, size, export participation, and sector of activity. Further, the analysis finds that investing simultaneously in multiple KBC assets has complementary as well as substitution effects on firm productivity, with different interdependence patterns for specific investment combinations across groups of firms and sectors.