Knowledge Constraints and Firm Growth

46 Pages Posted: 5 Dec 2017

Date Written: November 30, 2017


Firms are dynamically constrained in growing knowledge capital due to frictions on the transfer of firm-specific tacit knowledge (such as in the process of recruiting and training skilled labor). Constrained firms must therefore forgo some positive-NPV projects during their growth. I embed micro-founded knowledge constraints in a q-theory model of a firm with two capital goods, structurally estimate the model using data on firm R&D investment, and compare the impact of knowledge constraints with that of financial frictions on firm investment and growth dynamics. I find that knowledge constraints subsume the role of financing frictions in explaining the dynamics of R&D-performing firms and endogenously yield firms with higher returns to R&D investment than to physical investment, a persistent puzzle in the R&D literature. Small, growing firms are especially affected by the constraint and consequently are more R&D intensive and have higher returns to R&D than larger firms.

JEL Classification: D2, G31, G32, J24, O32

Suggested Citation

Parham, Robert, Knowledge Constraints and Firm Growth (November 30, 2017). Available at SSRN: or

Robert Parham (Contact Author)

University of Virginia ( email )

1400 University Ave
Charlottesville, VA 22903
United States


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