As discussed in previous chapters, and especially with reference to both Figure 8.2 and equations (9.2) and (9.9), indigenous R&D entails a fundamental investment in the innovation process and one that drives productivity growth at all levels of aggregations. To a lesser extent, so too is purchased technology that enters the firm’s production process in the form of new capital equipment. Such purchased technology embodies the innovations, and hence the R&D, of those firms producing new capital equipment.
Recall from equation (9.1), the generalizable production function applicable to the ith level of aggregation:
Qi = Ai F(K, L, T)i
and recall the representation of T from equation (9.2) as:
Ti = G(OTi, PTi, GTi, IT),
where OTi is the ith economic unit’s own or self-financed stock of technical knowledge, PTi is its purchased stock of technical knowledge, GTi is its government-financed stock of technical knowledge, and IT is available infrastructure technology. Table 9.2 summarizes the foundation literature on the disaggregation of R&D; in this chapter we focus on the vast contemporary literature related to one particular purchased technology - information technology - and we do so within the context of a discussion of skill-biased technological change.
As discussed in Bound and Johnson (1992) and Petit and Soete (2001), a widening of the wage differential between low-skilled and high-skilled workers in almost all OECD nations has occurred despite a large increase in the number of high-skilled workers. One explanation for this increase in the rate of return to investment in education is what economists call skill-biased technological change (SBTC). The SBTC hypothesis, originally proposed by Nelson and Phelps (1966) and extended by Griliches (1969, 1970) and Welch (1970), asserts that the value