The Dynamics of Innovation and Investment,

Ever since the start of the Industrial Revolution in Britain in the 1760s, innovation and investment have been crucial elements in economic explanations of the dynamics of capitalism. Classical economics recognises that innovation embodied in the form of new machines through fixed capital investment is the essential process for realising economic development. This study sets up a theoretical linkage between innovation and investment in historical time, without reference to any static equilibrium model. In this way, the relationship between instability of cycles and trend growth can be clearly identified. A theoretical framework and specific model of innovation and investment are developed. This is followed by an empirical investigation in support of this analysis to show plausibility in the important linkages between innovation and investment that have been missed when examined through static analysis of these relations. The statistical analysis is based on recent Australian industry sector data (1984-98) on R&D and capital expenditure in panel data form and in evolutionary industry life-cycle form. Conclusions from this work indicate the need to reexamine the way strategies are formed and developed in both the private and public sectors for more effective appropriation of innovation into the investment planning process.