This paper estimates the effects of innovations on productivity growth and the productivity elasticity of R&D capital. Firms need to introduce or improve products or production processes over time first to satisfy market needs, second to cope with increased competition from diffusion phenomena. We introduce explicitely innovations into a production function and evaluate their contribution to growth. Innovations push productivity growth up to 12-18% in the long run and up to 7.3% in the short run, according to whether products, processes or both are introduced. We then calculate TFP growth elasticity to R&D capital through the "innovation effect". Furthermore, we allow R&D capital or labor to enter the technological coefficient as conventionally done in the literature. R&D changes increase TFP level more than TFP growth. TFP level elasticity however is smaller than existing evidence for French and German firms, but comparable to US elasticity for 1980s. We finally computer the marginal product of R&D capital. On average, the estimated rate of return to R&D activity is comparable to French and German figures.
- Total Factor Productivity,